TIDMHGT
RNS Number : 6770M
HgCapital Trust PLC
18 September 2023
H gCapital Trust plc
INTERIM RESULTS FOR THE PERIODED 30 JUNE 2023
Resilient NAV performance and continued realisation activity in
a challenging macro environment
London, 18 September 2023: HgCapital Trust plc ('HGT'), today
announces its interim results for the period ended 30 June
2023.
HGT provides investors with a listed vehicle to invest in
unquoted businesses managed by Hg, Europe's largest investor in
software & technology-enabled services businesses.
The objective of HGT is to provide shareholders with consistent
long--term returns in excess of the FTSE All--Share Index by
investing predominantly in unquoted companies where value can be
created through strategic and operational change.
Highlights over the first half of 2023 include:
! Strong portfolio trading continued to be the main driver of
performance, contributing to a total return NAV increase of 4.6%,
closing the period at 473.1p NAV per share and net assets of GBP2.2
billion
! Share price total return of +7.1% over the period, closing at
370.50p per share and a market capitalisation of GBP1.7 billion
! Against an uncertain macro environment, Hg maintained a
disciplined approach to new investment, deploying GBP33 million on
behalf of HGT, including one new investment and several follow-on
investments in the portfolio to finance bolt-on M&A
! GBP229 million returned to HGT, including the full realisation
of Transporeon
! Continued and significant long-term NAV outperformance of the
FTSE All-Share
! Performance provided through access to Hg's investments, which
would in aggregate represent the second largest and the fastest
growing technology firm in Europe(1)
An investment of GBP1,000 made 20 years ago in HGT would now be
worth GBP24,963, a total return of 2,396%. An equivalent investment
in the FTSE All-Share Index would be worth GBP4,208(2)
Jim Strang, Chairman of HGT, commented:
"Your Company has delivered a resilient performance over the
first six months of the year. The portfolio continued to deliver
strong underlying performance with sales and EBITDA across the top
20 investments (76% of the portfolio) growing at 29% and 30%
respectively. Investment activity was noticeably slower in the
first half of 2023 as the Manager took a cautious stance on adding
to the portfolio. Conditions for transactions in the second half of
the year appear more supportive."
(1) By Enterprise Value, Source: Hg, Factset
(2) All references to total return allow for all historic
dividends being reinvested
Please note: Past performance is not a reliable indicator of
future results. The value of shares and the income from them can go
down as well as up as a result of market and currency fluctuations
and investors may not get back the amount they originally
invested.
David Toms, Head of Research at Hg, commented:
" Our portfolio continues to be driven by growth from existing
customers, itself supported by strong renewal rates, cross and
up-sell. We enhance this with consistent M&A, which remains a
powerful accelerant of our performance."
SUMMARY performance
31 August % Total 30 June 31 December % Total
2023 return 2023 2022 return
---------------- ----------- ---------- --------- ------------- ----------
NAV per share 473.3p +4.7% 473.1p 456.6p +4.6%
Share price 389.0p +12.4% 370.5p 350.5p +7.1%
FTSE All-Share
Index +2.7% +2.6%
---------------- ----------- ---------- --------- ------------- ----------
YTD 2023 H1 2023
Movement Movement
Net Asset Value GBP2.2bn +GBP77m GBP2.2bn GBP2.1bn +GBP76m
---------------- ----------- ---------- --------- ------------- ----------
Source: Hg, Factset. All references to total return allow for
all historic dividends being reinvested
Note: Hg undertakes full revaluations of the portfolio on a
quarterly basis, the next process being 30 September 2023,
therefore the movement in unrealised value of the portfolio to the
end of August 2023 is attributable to post-period transactions and
FX only.
Performance overview
Net assets of GBP2.2 billion, with continued long-term
outperformance of the FTSE All-Share over one, three, five, ten and
twenty-year periods:
- NAV per share of 473.1p, a total return of +4.6% for the six months to 30 June 2023.
- Share price total return of +7.1% over the year
- Proposed interim dividend of 2.0p per share
Strong double-digit growth from the realised and unrealised
portfolio:
- Revenue and EBITDA growth of 29% and 30% respectively across
the top 20 investments (76% of the portfolio) over the last twelve
months.
- GBP229 million of cash returned to HGT primarily through the
realisation of Transporeon and secondary fund transactions
- Valuation multiple (EV/ LTM EBITDA) of 26.2x and net debt to
LTM EBITDA ratio of 7.4x for the top 20 investments (76% of the
portfolio)
Continued investment and commitments to drive future value:
- GBP33 million invested on behalf of HGT into one new platform
investment, and several follow-on investments to support the growth
of existing portfolio companies
- New commitment of EUR125 million to Hg Mercury 4. Total
outstanding commitments at 30 June 2023 of GBP1.1 billion (December
2022: GBP1.2 billion). These will be deployed over the next three
to four years
- HGT's strong liquidity position coupled with commitments
across the most recent vintage of Hg funds ensure that the company
is well-positioned to take advantage of investment opportunities as
they arise
Credit facility increase:
- The Board of HGT agreed a c.GBP60 million increase to the
multi-currency revolving credit facility bringing the total
facility to GBP350 million, the full balance of which was available
at period-end
POST PERIOD EVENTS
-- NAV of 473.3p at 31 August , YTD performance of 4.7%
reflecting post-period transactions and FX movements.
-- Net assets of GBP2.2 billion at 31 August.
-- Share price of 389.0p at 31 August , YTD performance of
+12.4%.
-- Estimated gross proceeds of GBP55 million from the full exit
of Commify, and partial exits of Azets and TeamSystem to be
received post period, at an average uplift to carrying value of
39%.
-- New investment of GBP6m in Nomadia
-- Further EUR50m commitment to Hg Mercury 4 (EUR175 million
total commitment)
-- Available liquid resources (including the credit facility)
post-completion of all announced transactions and the interim
dividend payable in October 2023, are GBP657 million (30% of 31
August pro-forma NAV).
-- Outstanding commitments of GBP1.1 billion (49% of 31 August
pro-forma NAV). We expect these to be drawn down over the next
three to four years.
Outlook
Commentary from Hg (the Manager):
We believe the combination of the long-term nature of listed
private equity investment with the types of business that Hg
invests in, and robust double-digit growth in trading, can continue
to drive long-term performance
-- Against a challenging macro environment, Hg's portfolio has
demonstrated resilient performance
-- The portfolio companies remain focused on selling
business-critical and non-discretionary software and services to
their underlying business customers, delivering predictable levels
of recurring revenue
-- Positive trading outlook underpinned by long-term drivers for
workplace automation and digitisation which are set to transform
the workplace for professionals for decades to come
-- While we continue to screen a number of attractive investment
opportunities, we remain cautious given the ongoing macro
uncertainty. Bolt-on M&A remains a key focus to deploy capital
and create incremental equity value in the portfolio
-- During the first half of 2023, we remained focused on
returning capital to Hg clients, distributing c.GBP1 billion of
liquidity, including GBP109 million to HGT. This followed an
exceptionally strong 2022, when we returned a total of GBP4
billion, of which HGT's share was GBP404 million. Further liquidity
events are expected over the next twelve months
- Ends -
The Company's 2023 Interim Report and an animated presentation
from Hg to accompany the results are available to view at:
http://www.hgcapitaltrust.com/ .
For further details:
HgCapital Trust plc
Laura Dixon +44 (0) 78 2459 2894
George Crowe +44 (0) 20 8152 5880
Brunswick
Azadeh Varzi +44 (0)20 7404 5959
About HgCapital Trust plc
HgCapital Trust plc is an investment company whose shares are
listed on the London Stock Exchange (HGT.L). HGT gives investors
exposure, through a liquid vehicle, to a portfolio of high-growth
unquoted companies, managed by Hg, an experienced and
well-resourced private equity firm with a long-term track record of
delivering superior risk-adjusted returns for its investors.
For further details, see www.hgcapitaltrust.com and
www.hgcapital.com
Interim report and accounts
30 June 2023
HgCapital Trust plc (the "Company" or "HGT") announces its
interim results for the 6 months ended 30 June 2023 and the
publication of its Interim Report for the same period.
The objective of HgCapital Trust ('HGT') is to provide
shareholders with consistent long-term returns in excess of the
FTSE All-Share Index by investing predominantly in unquoted
companies where value can be created through strategic and
operational change.
Financial and performance highlights
2023 performance at a glance
GBP2.2bn
Net assets
As at 31 December 2022: GBP2.1bn
+4.6%
NAV per share (473.1p)
6 months ended 30 June 2022: +1.8%
GBP1.7bn
Market capitalisation
As at 31 December 2022: GBP1.6bn
+7.1%
Share price (370.5p)
6 months ended 30 June 2022: -20.5%
2.0p
Interim dividend
As at 30 June 2022: 2.5p
1.6%
Total annualised ongoing charges
As at 30 June 2022: 1.3%
GBP33m
Cash invested on behalf of HGT
6 months ended 30 June 2022: GBP71m
GBP229m
Cash returned to HGT
6 months ended 30 June 2022: GBP29m
GBP597m
Available liquid resources
(28% of NAV)
As at 31 December 2022: GBP476m (23% of NAV)
GBP1.1bn
Outstanding commitments
(50% of NAV)
As at 31 December 2022: GBP1.2bn (57% of NAV)
Note NAV per share and share price return on a total return
basis assuming all historical dividends have been re-invested,
which is an Alternative Performance Measure ('APM').
Top 20 investments (76% of portfolio value)
A snapshot as at 30 June 2023
+29%
LTM sales growth
LTM 30 June 2022: +31%
+30%
LTM EBITDA growth
LTM 30 June 2022: +26%
26.2x
EV to EBITDA multiple
As at 31 December 2022: 27.2x
7.4x
Net debt to EBITDA ratio
As at 31 December 2022: 8.0x
GBP10bn
LTM revenues
LTM 30 June 2022: GBP7.7bn
GBP3bn
LTM EBITDA
LTM 30 June 2022: GBP2.4bn
30%
EBITDA margin
LTM 30 June 2022: 31%
Our portfolio continues to be driven by growth from existing
customers, supported by strong renewal rates, cross and up-sell. We
enhance this with M&A, which remains a powerful contributor to
our performance.
David Toms, Head of Research, Hg
Chairman's statement
Your Company has delivered a resilient performance over the
first six months of the year. The portfolio continued to deliver
strong underlying performance with sales and EBITDA across the top
20 investments (76% of the portfolio) growing at 29% and 30%
respectively. Investment activity was noticeably slower in the
first half of 2023 as the Manager took a cautious stance on adding
to the portfolio. Conditions for transactions in the second half of
the year appear more supportive.
Jim Strang, Chairman, HgCapital Trust
Dear Shareholder,
The first six months of 2023 have provided a measure of respite
from the volatile market conditions that prevailed throughout 2022.
While the external environment continues to see elevated levels of
risk, there has been a degree of stabilisation. At a macroeconomic
level, it would appear interest rates are nearing their peaks for
this current cycle, while there are encouraging signs of lower
levels of inflation, especially in the USA. The geo-political
environment remains challenging; however, it also appears to be
stable for the time being.
Highlights in H1 2023 included:
-- 4.6% NAV per share growth on a total return basis, with net
assets of GBP2.2 billion;
-- GBP229 million of proceeds returned to HGT, with one full
realisation at an uplift to book value of 18%;
-- GBP33 million of new and further investments by HGT, across
the core investment clusters targeted by Hg;
-- GBP107 million newly committed to invest alongside new Hg
funds over the next three to four years.
Performance
The NAV of HGT increased by 4.6% on a total return basis over
the first half of 2023, reflecting the ongoing strength of the
operating performance of the HGT portfolio. HGT's share price saw a
total return of 7.1% over the period and has seen a CAGR on a total
return basis of 17.5% p.a. over the past 20 years, outperforming
the FTSE All -- Share index by 10.1% p.a. over the same period.
The total net assets of HGT at 30 June 2023 were GBP2.2 billion,
an increase of GBP76 million over the reported figures at 31
December 2022. The analysis of NAV movements (on page 30 of the
full Interim Report and accounts) set out a breakdown of movements
in the NAV and the underlying investment portfolio.
At the end of June 2023, the HGT portfolio consisted of 48
investments, all of which conform to the Hg sector focus and
investment strategy, targeting software and tech-enabled services
businesses. These assets have continued to perform well in
aggregate. The underlying performance of the portfolio developed
very much in line with progress seen in recent years. The top 20
underlying companies (76% of the portfolio) continued to show
strong revenue growth over the last 12 months of 29% (June 2022:
31%) and EBITDA growth of 30% (June 2022: 26%), reflecting the
defensive-growth nature of the businesses in which HGT is invested.
The portfolio not only continues to generate strong top line growth
but profitability remains as robust as ever, with the top 20
companies reporting an average EBITDA margin of 30%. Currently, 97%
of the portfolio by value is held above its original cost of
acquisition, a testament to the asset selection and value creation
skills of the Manager.
These companies which benefit from highly predictable forward
cash flows, are appropriately financed with significant covenant
flexibility.The top 20 investments have seen a weighted average net
debt -- to -- EBITDA ratio of 7.4x (December 2022: 8.0x), which we
feel is appropriate given the highly recurring revenues of the
businesses that make up the Hg portfolio. Given the average
valuation multiple for the portfolio is 26.2x EV-to-EBITDA, this
implies a loan-to-value across the portfolio of c.28%, implying
significant equity cushion within the portfolio and giving the
Manager confidence that this is a prudent level of leverage for the
assets within the portfolio. The Manager has a dedicated capital
markets team who continually monitor and manage the capital
structures of the underlying portfolio companies to ensure they are
as robust and flexible as possible in terms of tenor, interest cost
and time to maturity.
Investments and realisations
New investment activity was relatively light over the first six
months of the year with a total of GBP33 million deployed in one
new acquisition (GTreasury; Hg Mercury 4) and several follow-on
investments to finance bolt-on M&A, an area which the Manager
has highlighted as particularly attractive in the current
environment and where the sector-leading businesses across the
portfolio can further improve their market positions.
A total of GBP229 million was received from full and partial
exits, notably from the completion of the previously announced sale
of Transporeon. This exit was originally signed in late 2022,
generating proceeds of GBP109 million for HGT, an uplift of 18% to
the last carrying value of the investment. The fund level portfolio
rebalancing that was announced previously, involving a resizing of
the commitment to Hg Saturn 3 and a partial secondary sale of Hg
Genesis 8, has also now been completed.
Realisation activity has continued post-period, with the
signings of partial exits of TeamSystem and Azets and the full exit
of Commify. These transactions represented significant uplifts to
carrying value of 68%, 16% and 32% to their last carrying value
respectively. This illustrates the attractiveness of HGT's
portfolio companies to buyers, despite the uncertain macro
environment and rising cost of debt required to finance
acquisitions.
Fundraising
Hg's success in building and creating value in the portfolio
supported a new round of fundraising in the period, in which HGT
participated, to support HGT's long-term NAV growth ambitions. Hg
has raised significant capital over the last two years and HGT will
continue to participate across the Hg fund families as Hg's largest
single investor. HGT's commitments to the new Hg funds ensure that
HGT maintains access to Hg's transactions, including co-investment
opportunities, in what is anticipated to be an attractive
environment for new investments. HGT continues to benefit from a
unique opt out clause within its underlying investment agreements
with Hg, allowing HGT to opt out of new investments without
penalty, should it not have sufficient liquidity. This provides a
useful risk management tool for the Board in managing and
optimising the HGT balance sheet.
Balance sheet
In order to grow the NAV of our portfolio and deliver returns
for shareholders, HGT operates in a continual cycle of commitment,
investment and realisation of the underlying investments. This
process involves continual monitoring and revision of forecasts and
estimates, as they relate to the portfolio and the impact on HGT's
balance sheet.
Consequently, the board has developed a wide range of tools to
optimise the balance sheet to fund future investment activity.
As part of this tool-kit, HGT uses a revolving credit facility
to support the investment programme and to improve balance sheet
efficiency. In 2023, HGT increased its facility to GBP350 million,
c.15% of NAV, consistent with the historical sizing of this
facility. This will aid in the cash flow management of HGT in what
seems likely to be a more uncertain transaction environment.
As I noted in my report to you in March, the Board has adopted a
revised and improved policy as regards share buybacks and, as a
result, executed one buyback in 2022. The level of the discount on
the shares is monitored daily as part of this process, with the
Board convening as guided by the process to discuss the merits of
any buyback given the level of the discount, market conditions more
broadly and the likely impact on future NAV growth and commitment
levels from any actions contemplated.
There are signs that the challenging conditions for private
equity transactions are easing somewhat as we enter the second half
of the year and noticeably in the structurally growing sectors and
with the types of highly resilient assets that align with your
Company's investment strategy. Your Board and the Manager are
optimistic that the remainder of 2023 will see not only ongoing
strong performance from the portfolio but also an increase in the
pace of the new investment activity that supports long-term value
creation at HGT.
HGT portfolio management
As I noted in my previous full year report, in addition to
seeking to optimise the balance sheet through debt and equity
capital markets, the Board also looks to take advantage of market
driven opportunities to manage the portfolio construction of HGT,
achieving the optimal balance of asset and vintage exposure across
the various Hg fund structures that constitute the portfolio.
As reported previously, HGT has now completed the sale of c.25%
of HGT's remaining investment in Hg's Genesis 8 Fund, delivering a
return of 3.2x invested cost. This transaction was priced at 100%
of Hg Genesis 8's December 2022 NAV and provides further strong
validation of the HGT valuation policy, generating net proceeds to
HGT of just over GBP91 million. In April, the Board and the Manager
also agreed to take advantage of the opportunity to resize HGT's
original commitment to Hg Saturn 3, reducing it by c.15%, in light
of a review of changes in the investment landscape before the final
closing of the vehicle.
The adjustments to the HGT investment profile not only allow for
significant cash to be returned to HGT at attractive valuations but
allow for increased investment, particularly through increased
exposure to co-investments where HGT has a stated goal of investing
10% -15% of capital. A final benefit of these adjustments is that
they provide a mechanism to help manage the single asset
concentration in the largest individual investments in the
portfolio.
Impact and responsible investment
Your Board and the Manager, Hg, continue to increase their focus
on the topics of ESG and sustainability. We share a firmly held
view that not only should the financial returns to you, the
shareholders, be attractive, but these must be delivered in a
manner which is consistent with our responsibility to society. As a
technology investor, we understand the need to ensure that those
businesses in which we invest reduce their carbon footprint and
contribute to tackling climate change. The UNPRI assessment of Hg's
approach to responsible investment is 4* (82/100) for Investment
Stewardship Policy and 5* (100/100) for Private Equity, and the
Board of HGT meets regularly with the Hg Responsible Investment
team to ensure that Hg's work is well understood and endorsed by
the Board.
As we have previously reported, Hg launched The Hg Foundation in
2020 - a charitable initiative to provide funding and operational
support to initiatives across Europe, the UK and the US. The Hg
Foundation's goal is to have an impact on the development of those
skills and learning most required for employment within the
technology industry, focusing on individuals who might otherwise
experience barriers to access this education. This Foundation is
funded by the Hg management company and its team members.
Responsible Investment: see pages 26 to 27 of the full Interim
Report and accounts.
The Hg Foundation: see page 27 of the full Interim Report and
accounts.
Dividend
As a principle, your Company aims to achieve long-term growth in
the net asset value per share and in the share price as a primary
goal, rather than to deliver a specific dividend stream.
In order to maintain its status as an investment trust, HGT is
not permitted to retain more than 15% of taxable income in any
given financial year. Consequently, HGT distributes at least 85% of
this taxable income each year as a dividend.
The level of this taxable income is influenced by the capital
structures of the transactions entered into by Hg and by income
received on liquid resources held by the balance sheet.
As a result, this income can and does vary from one year to
another, with a relatively low level of predictability and this in
turn has an impact on the funds available each year for
dividends.
In the Report and Accounts for the year ended 31 December 2022,
your Board indicated a full year dividend of 5.0 pence per share to
be a reasonable basis for a level that the Company should be able
to sustain, given all the aforementioned detail.
As regards the current financial year, HGT will pay an interim
dividend of 2.0 pence per share (2022: 2.5 pence per share),
payable in October.
The Board will communicate further guidance on the dividend to
shareholders when it is practicable to do so.
Dividend: see page 61 of the full Interim Report and
accounts.
Dividend re -- investment plan: page 61 of the full Interim
Report and accounts.
Board and governance
As I noted in my previous statement, HGT is embarking on a
process to find a new Non-Executive Director to replace Anne West,
who has chosen not to stand for re-election to the Board at the
next AGM in May 2024, after ten years of service on the Board. This
process is now well underway. The Nominations Committee has defined
a scope for the skills and experience which would be most additive
to the Company and an external firm of headhunters has been engaged
to support the Nomination Committee and the Board in delivering a
successful outcome to this process. The expectation is that this
process will conclude before the end of the year and any
announcements will be made in due course.
Prospects
Your Company has delivered a resilient performance over the
first six months of the year with the portfolio delivering strong
underlying growth. Investment activity has been noticeably slower
in the first half of 2023 as the prevailing high degree of
uncertainty and tight capital markets conditions combined to make
transactions challenging. There are signs that these conditions are
starting to abate somewhat, and noticeably in the sectors and with
the types of assets that align with your Company's investment
strategy. The significant liquidity generated in the period not
only validates the market value of the assets in the portfolio but
further strengthens the balance sheet to be able to capitalise on
future opportunities as they present themselves. With our defensive
portfolio of companies and prudent management of the balance sheet,
the Company is well positioned to take advantage of investment
opportunities as they arise.
Jim Strang
Chairman
15 September 2023
Manager's update
Our portfolio continues to be driven by growth from existing
customers, supported by strong renewal rates, cross and up-sell. We
enhance this with M&A, which remains a powerful accelerant of
our performance.
David Toms, Head of Research, Hg
All investments sit within Hg's sweet-spot in software and
tech-enabled services across eight industry verticals or 'clusters'
as we continue to build on Hg's position as one of the largest
software groups in the world.
Luke Finch, Head of Client Services, Hg
The first half of 2023 has seen a marked improvement in investor
sentiment towards software and tech-enabled services ('S&S') in
the public markets. After stabilising in the second half of 2022,
S&S multiples have rebounded strongly in 2023, with the
valuation of the largest public software index up over 25% so far
this year. We think it would be brave to extrapolate such valuation
progression into the second half of the year, given we are already
at pre-COVID valuation highs, but investor sentiment around the
prospects for software and tech-enabled services is clearly much
more positive than it was at the start of 2023.
From a trading perspective, we commented in May that "the
broader backdrop is less benign than previous years", based on the
lack of growth in sector earnings forecasts in the second half of
2022. However, the first half of 2023 has seen an improvement in
this metric, with sector earnings growth forecasts increasing by
c.10% on an annualised basis over the period. As currency headwinds
abate further, we see scope for this to sustain in the second half.
Across the industry, although we have seen some companies report
increasing pressure on new business (and we are seeing some similar
effects within the portfolio), the impact of this is relatively
minor. The majority of our revenue arises from the existing
customer base, where we continue to see strong renewal rates,
driven by cross and up-sell.
We can see the impact of slower new business by analysing the
growth rate expectations for US-listed public software companies.
We categorise these into 'Typical Hg Businesses' with 5-15%
estimated organic revenue growth, and 'High growth, Low margin'
businesses with 15%+ estimated organic revenue growth rates. For
the Typical Hg Businesses, the average growth rate expectation
since December 2020 has been remarkably stable at c.10%. In
contrast, the high growth companies, typically much more dependent
on new business, have seen an 11pp reduction in growth rate
expectations, from 26% to 15%. This resilience and ability to
generate growth from the existing customer base, underpins the vast
majority of our portfolio.
The biggest news item of the first half is clearly the
widespread publicity around generative AI (Chat GPT and its
siblings), which has arguably been responsible for at least some of
the renewed investor enthusiasm for software. This is not a new
topic to us at Hg; in addition to a multi-year involvement in beta
programs from some of the largest industry players in Generative AI
products, our in-house data team continues to work across the
portfolio on leveraging the capabilities of data analytics, machine
learning and AI in its multiple forms. What has changed in the last
six months has been the commercially available capabilities that we
can leverage through all our businesses.
Our investment philosophy revolves heavily around the automation
of business processes, and Generative AI dramatically increases the
range of processes we can cover. In the same way that SMB
accounting software enabled non-accountants to maintain their
financial statements, AI opens a wide range of tasks up to
non-specialists. Whether this will be automating graphic design (as
demonstrated by Adobe, where its beta program for an AI enabled
product saw uptake eighty-fold greater than management had
expected) or legal workflow (as we are tackling within the Hg
portfolio), we are very early in the democratisation of a wide
range of additional software use cases that will drive a material
increase in overall market opportunity. Innovation, in its
multitude of forms, remains a secular long-term driver of
opportunity.
Despite the Hg portfolio's positive NAV development in the first
half, investors may notice that the performance has lagged public
markets over the very short term. This is entirely a result of
lower volatility in our valuation multiples; our earnings growth is
comfortably ahead of public comparators. We use an unweighted
valuation methodology (which tends to be less volatile as it is not
skewed by movements in large index constituents) and we also
include private transaction comps. As a result, we participate
neither in the mood swings of extreme euphoria and extreme
depression, to which the public markets (and particular indices)
can be prone.
Furthermore, although our valuation process is based partly on
public comparators, as with our companies, the vast majority of
these are profitable, established businesses. Such businesses have
shown much more limited valuation volatility in keeping with their
robust, predictable nature.
As we have previously indicated, in any quarter, there are two
main factors influencing our valuations:
-- Valuation change in public comparators, of which we, very
broadly, see around half the impact in any one quarter. Our
valuation model is driven partly by such inputs, but also by less
volatile, longer-term M&A comps in the public and private
markets.
-- Growth in earnings. Our companies have typically grown their
EBITDA historically by 10-15% organically each year, i.e. c.3% each
quarter, and approximately doubled this on an 'all in' basis
including M&A.
The relative pace of both movements (rating changes can be
relatively rapid; earnings growth tends to be much steadier)
dictates movements in any one quarter, but over time, earnings
growth tends to dominate. We remain aware, however, that events
rarely align perfectly along a timeline, and there is a risk that a
combination of geopolitical challenges, fiscal tightening, supply
chain constraints, and cost increases, cause broad economic
challenges to which our portfolio's end customers may respond with
temporarily lower investment (postponing investments in systems and
software), before the structural factors that drive the need for
software reassert themselves.
Looking to the second half of the year - we would be very
surprised to see H1's multiple expansion repeat in H2. However, in
our view, when set against the broader market context, software
does not feel overly exposed at present, particularly given the
stability of its growth.
Given the stability of growth and margin opportunity, we expect
robust organic earnings growth to continue.
In our view, sector sentiment is likely to be underpinned by
slightly more positive earnings reports from the US as last year's
currency headwinds abate. Beyond this, for our portfolio, M&A
remains a key driver of outperformance and we continue to execute
on a strong set of opportunities.
Activity levels
As previously stated, in any rolling 12-month period, the
investment teams across Hg look to make between 8 and 16 new
platform investments in total across the active Hg Saturn, Hg
Genesis and Hg Mercury funds, and we also seek to deliver similar
numbers of liquidity events (sales or partial sales of portfolio
companies and refinancings) each year. We believe the pace of
investment should continue at broadly this level over the medium
term. However, while we continue to see opportunities, we are in a
period of reduced activity for platform acquisitions, as seller
expectations adjust and react to the macro-outlook and in
particular the new interest rate environment.
In contrast, M&A activity within the existing portfolio
remains high. From any new investments we make, there is a further
flow of M&A opportunities, adding to the breadth and depth of
our organic development, and catalysing cross sales to existing and
acquired customers. Portfolio M&A is at an all-time high,
reflecting a more liquid and attractive pricing environment for
these, typically smaller, opportunities. We have previously
indicated a run-rate of somewhere in excess of 100 such
acquisitions a year, and we are running at over twice that rate at
present. The valuations for such investments tend to be around half
the level of the platform companies that are acquiring them,
providing an attractive source of enhanced returns.
To give a further sense of scale, the combined enterprise value
of the businesses within Hg's portfolio now totals to over $125
billion at 30 June 2023.
Overview of the underlying investments
held through HGT's limited partnerships
Investments Residual Total Portfolio Cum.
(in order cost valuation(1) value Value
of value) Fund Sector Location Vintage GBP000 GBP000 % %
=================== ============ ============== =========== ======= ========= ============ ============== ==================
1 Access S3/G8/HGT ERP & Payroll UK 2020 149,243 290,918 12.4 12.4
Tax &
Accounting/ERP
2 Visma G7/S1/S2/HGT & Payroll Scandinavia 2020 89,768 208,871 8.8 21.2
3 Howden S2/HGT Insurance UK 2021 75,657 137,055 5.8 27.0
4 IFS Workwave S3/HGT ERP & Payroll Scandinavia 2022 111,901 119,514 5.0 32.0
Legal &
Regulatory
5 Litera G8/G9 Compliance N.America 2019 28,919 107,867 4.5 36.5
Tax &
Accounting/ERP
6 IRIS S1 & Payroll UK 2018 36,380 99,143 4.2 40.7
7 P&I G7/S1/HGT ERP & Payroll Germany 2020 44,156 99,130 4.2 44.9
Legal &
Regulatory
8 Ideagen G10/G9/M3 Compliance UK 2022 68,257 88,870 3.7 48.6
Legal &
Regulatory
9 Septeo G9 Compliance France 2020 38,545 79,191 3.3 51.9
Tax &
10 insightsoftware S2/HGT Accounting N.America 2021 57,494 74,353 3.1 55.0
Capital Mkts &
11 FE fundinfo M2/G9 Wealth Mgmt IT UK 2017 26,154 71,621 3.0 58.0
Tax &
12 Sovos S2/HGT Accounting N.America 2020 54,455 60,703 2.6 60.6
13 team.blue G10/G8 Tech Services Benelux 2018 37,569 57,666 2.4 63.0
14 GGW M2/M3 Insurance Germany 2020 15,377 54,053 2.3 65.3
Tax &
15 Azets G7/HGT Accounting UK 2016 20,966 53,813 2.3 67.6
Capital Mkts &
16 Argus Media S1/HGT Wealth Mgmt IT UK 2020 27,384 49,830 2.1 69.7
17 Norstella M2/G9/HGT Healthcare IT N.America 2021 29,274 45,458 1.9 71.6
Automation &
18 Trackunit G9 Engineering Scandinavia 2021 26,593 40,826 1.7 73.3
19 Rhapsody M2/M3/HGT Healthcare IT N.America 2018 20,814 37,056 1.6 74.9
Automation &
20 MeinAuto G8 Engineering Germany 2017 25,233 36,439 1.5 76.4
Legal &
Regulatory
21 Waystone S2 Compliance UK 2022 38,449 36,224 1.5 77.9
22 Citation G8 Tech Services UK 2020 19,348 34,770 1.5 79.4
Tax &
23 Prophix G9 Accounting N.America 2021 17,139 32,892 1.4 80.8
24 Benevity S2/HGT ERP & Payroll N.America 2021 32,124 32,456 1.4 82.2
Tax &
25 Caseware G8 Accounting N.America 2020 21,255 31,996 1.3 83.5
Capital Mkts &
26 Gen II G9 Wealth Mgmt IT N.America 2020 19,921 31,842 1.3 84.8
27 Intelerad G8 Healthcare IT N.America 2020 11,870 29,664 1.3 86.1
Tax &
Accounting/ERP
28 TeamSystem G8 & Payroll Italy 2021 10,586 29,044 1.2 87.3
29 HHA G9 Healthcare IT N.America 2021 24,035 26,682 1.1 88.4
Project Tax &
30 CH S2 Accounting Germany 2021 18,393 24,877 1.0 89.4
Tax &
31 DEXT S1/HGT Accounting UK 2021 15,620 23,830 1.0 90.4
Capital Mkts &
32 smartTrade M2/HGT Wealth Mgmt IT France 2020 18,821 23,111 1.0 91.4
Tax &
33 LucaNet G9 Accounting Germany 2022 15,649 21,601 0.9 92.3
Capital Mkts &
34 Nitrogen M3/HGT Wealth Mgmt IT N.America 2021 15,868 19,652 0.8 93.1
Tax &
35 GTreasury M4 Accounting N.America 2023 15,569 16,138 0.7 93.8
Tax &
36 Silverfin M2/HGT Accounting Benelux 2019 10,046 15,679 0.7 94.5
37 Commify M1/HGT Tech Services UK 2017 4,080 15,451 0.7 95.2
Capital Mkts &
38 Pirum M3/HGT Wealth Mgmt IT UK 2022 13,928 15,215 0.6 95.8
Automation &
39 Auvesy M3 Engineering Germany 2021 8,130 14,271 0.6 96.4
40 F24 M2/HGT Tech Services Germany 2020 10,589 14,189 0.6 97.0
41 Revalize G9 ERP & Payroll N.America 2021 18,686 12,495 0.5 97.5
Tax &
42 Serrala G9 Accounting Germany 2021 23,086 12,415 0.5 98.0
Legal &
Regulatory
43 Mitratech G7/HGT Compliance N.America 2017 3,328 12,138 0.5 98.5
44 Geomatikk M2/HGT Tech Services Scandinavia 2021 11,392 11,469 0.5 99.0
45 Fonds Finanz M3 Insurance Germany 2022 8,309 10,912 0.5 99.5
Capital Mkts &
46 TrustQuay M3 Wealth Mgmt IT UK 2022 8,970 9,842 0.4 99.9
47 Bright M3 ERP & Payroll Ireland 2021 6,529 8,622 0.4 100.3
48 Blinqx M3 ERP & Payroll Benelux 2022 3,833 5,141 0.2 100.5
Total buyout investments
(48) 1,409,692 2,384,995 100.5 100.5
============================= ============== =========== ======= ========= ============ ============== ==================
Other Hedges and other fund interests 13,141 (12,411) (0.5) (0.5)
Total all investments 1,422,833 2,372,584 100.0 100.0
============================= ============== =========== ======= ========= ============ ============== ==================
(1) Including accrued income of GBP136,778,000, but before a
deduction for the provision for carried interest of GBP198,752,000
and fund level facilities of GBP362,028,000. Note that the
investments held at fair within the Balance Sheet on page 48 of the
full Interim Report and accounts exclude accrued income but include
the deduction for carried interest and the fund level
facilities.
Dividend
The interim dividend proposed in respect of the year ending 31
December 2023 is 2.0 pence per share.
Ex-dividend date 28 September
(date from which shares 2023
are transferred without
dividend)
=========================== ============
Record date 29 September
(last date for registering 2023
transfers to receive
the dividend)
=========================== ============
Last date for registering 13 October
DRIP instructions 2023
=========================== ============
Dividend payment date 27 October
2023
=========================== ============
Further Information
HGT's Interim Report for the six months ended 30 June 2023 is
available to view on HGT's website at: https://
www.hgcapitaltrust.com . In accordance with DTR 6.3.5(1A) of the
Financial Conduct Authority's Disclosure Guidance and Transparency
Rules, it has also been submitted in full unedited text to the
Financial Conduct Authority's National Storage Mechanism and will
shortly be available for inspection at
data.fca.org.uk/#/nsm/nationalstoragemechanism
ENDS
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END
IR LAMRTMTABBJJ
(END) Dow Jones Newswires
September 18, 2023 02:00 ET (06:00 GMT)
Hg Capital (LSE:HGT)
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