REG - HG Capital Trust PLC - Annual Financial Report <Origin Href="QuoteRef">HGT.L</Origin> - Part 2
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market application software (particularly delivered via a Software as
a Service ('SaaS') model); private electronic marketplaces; B2B media
information/publishing; and telecoms/datacentre operators.
Within these sub-sectors, we have invested in high quality businesses with
diverse customer bases, which feature subscription-based business models
generating predictable revenues and cash flows. The team regularly conducts
top-down research within the wider sector, in order to continue to identify
and assess further repeatable investment themes where we can invest time to
develop proprietary expertise.
Our highly resourced, dedicated team means that we are well placed to
identify, assess and complete investments quickly and thoroughly. We work to
bring our experience and expertise to support management teams, aiming to have
the knowledge of a trade buyer, coupled with the speed and focused delivery of
a financial buyer. The team benefits from the depth and breadth of many years
of TMT private equity experience, and is complemented by an extensive network
of industry experts and advisers.
Given the breadth of opportunity in European TMT, HgCapital is currently
investing in the sector from two funds. The HgCapital 7 buyout fund targets
businesses with enterprise values between £80 million and £500 million. The
HgCapital Mercury Fund targets smaller buyouts (enterprise values between £20
million and £80 million) but in exactly the same TMT sub-sectors. Investing
two funds across the sector allows us to bring significant team resource to
bear and provides a very comprehensive resource for the management teams that
we support.
Services
The Services sector is a large and wide-ranging segment which is traditionally
split into 'horizontal' business models such as: business process outsourcing;
facilities management; or testing and inspection provision. In contrast,
HgCapital's Services Team's investment approach concentrates much more on
specific end markets or customer segments, which we believe lead to attractive
business model characteristics. We have then invested time to develop a strong
understanding of the industry dynamics through top-down research or existing
investments, identifying service companies that sell into those specific end
markets.
Within the Services sector, the investment themes that have attracted us have
typically featured large fragmented small and medium-sized enterprise ("SME")
customer bases, long-term and stable customer relationships, and businesses
which provide business-critical services, preferably on a repeat or recurrent
basis. We target businesses with leading positions within a niche, typically
reflected by strong margins, and we aim to grow and scale these businesses,
either organically within existing markets (selling into their customer bases)
or through acquisition.
Existing investments include companies that serve a range of industries
including commercial laundry and catering equipment distribution, automotive
leasing, international business expansion services and distribution of
insurance, all of which have common characteristics including stable and
diverse customer bases; critical, repeated use products; and a strong value
proposition with a high level of customer service.
Industrials
HgCapital's Industrials Team is focused on partnering with growth businesses
within Europe and in particular in the German market, which is characterised
by a large number of highly successful, family-owned businesses (the
"Mittelstand"). We have earned a reputation as a preferred partner for many
Mittelstand companies, as a result of supporting the management of a number of
these hidden champions to scale into international businesses. The Industrials
Team, based in Munich, is located in the heart of an economic zone containing
numerous high-quality, cutting-edge, technology-led industrial businesses,
many of which have strong national or international positions in a specific
niche market, with the opportunity to scale further. Our thematic research
within this sector has been concentrated over many years on the
characteristics that define a strong industrial investment. As a result, we
have developed certain themes that we regard as particularly attractive:
Aftermarket companies; product champions/niche manufacturers; c-part
specialists; and smart distribution models.
Those themes are overlaid with specific industrial sub-sectors where we have a
strong understanding.
Renewable Energy
In 2004, HgCapital established a dedicated renewable energy investment team
and, after a period of research, raised its first dedicated fund in 2006. We
invest in utility-scale renewable energy projects in Western Europe using
proven technologies such as onshore wind, solar and hydro, adopting an
infrastructure fund investment approach. We focus on creating industrial scale
renewable energy platforms under our control, seeking to aggregate a number of
assets and to deliver economies of scale.
We believe this strategy presents an attractive investment opportunity, which
is estimated to require significant capital investment over the medium-term.
Technological advances and the increased scale of the industry have increased
the cost competitiveness of renewable energy, as well as providing favourable
inflation linkage and a hedge against fossil fuel costs. HgCapital's renewable
energy investment theme is focused on the most efficient technologies and best
resourced sites, requiring the least regulatory support and resulting in the
lowest costs for the consumer.
Investment is at an industrial scale affording the benefits of this in
procurement, attracting higher quality management teams, and creating
strategic value. HgCapital is one of the leading owners of onshore wind farms
in Scandinavia, has investments in Scandinavian district heating, is one of
the largest financial investors in Irish onshore wind, and has a substantial
portfolio of ground-mounted solar and small hydroelectricity projects in
Spain.
In addition to the sectors noted above, we look to use our long-term
investment experience in the healthcare sector to identify sub-sectors within
Services and TMT that take advantage of technological change, a key driver of
growth within the European healthcare sector.
CASE STUDY - JLA
Website: www.jla.com
Sector: Services
Geography: UK
"The active support from HgCapital has accelerated our growth through numerous
value-added projects and M&A. We look forward to our continued partnership
driving future value growth."
Stephen Baxter, CEO of JLA
Business description
Founded in Yorkshire in 1973, JLA is one of the UK's leading providers of
commercial laundry and catering equipment on a contracted basis. JLA operates
across a diverse sector base offering customers a fully inclusive machine
supply and service proposition under the name of Total Care. In addition, the
company provides customers with supplementary products and services (e.g.
service contracts, compliance and safety service solutions, equipment sales
and consumables). The company's services are typically provided under
eight-year contracts to customers who require laundry or catering equipment as
a "mission-critical" part of their operations.
The investment
JLA had been known to HgCapital for some time. Originally described as a
'washing machine distributor', JLA had enjoyed strong operating performance,
including sustained organic growth through the period 2007-2009 and displayed
many of the business model characteristics that we look for. The team worked
hard with the founder and the management team to complete the acquisition in
March 2010, valuing the company at an enterprise value of £150 million.
The investment case
JLA has a diverse customer base that considers laundry and catering as a
mission-critical part of their day-to-day business. With a high proportion of
customers on long-term contracts (representing a high level of revenues and a
greater proportion of profits), the company has an attractive business model,
characterised by a high level of recurring revenues and future revenue
visibility.
We saw the opportunity to grow the core Total Care division through the
professionalisation of sales and marketing. Whilst initially focusing on the
laundry division, there were good prospects to expand JLA's services across
other industry verticals and increase regional coverage.
Investment return multiple of cost: 3.5x
Gross IRR: 25% p.a.
How HgCapital has supported JLA
We worked alongside management to increase the benefit of selling new products
and services through JLA's existing sales force and service network.
A number of projects have been initiated covering strategic planning, customer
retention and pricing. In addition, management has been strengthened and ten
small bolt-on acquisitions of smaller laundry and kitchen equipment companies
have been completed, all funded out of free cash flow.
In 2011, the company introduced a detergent range to accompany the machinery
it leased, and in 2012, expanded its white goods reach, sourcing and leasing
equipment such as dishwashers. This expanded offering continued into other
catering equipment such as prime cooking and refrigeration. Catering equipment
now represents a third of JLA's overall revenues.
The business now has a dedicated M&A team and the pipeline for further
acquisitions is under development. We plan to continue to make further bolt-on
acquisitions, both in the laundry and catering markets.
Performance improvement
JLA's performance has been consistently strong with organic sales growth of
7-9% year-on-year. Sales doubled between 2009 and 2015 to £102 million. Over
the same period, EBITDA has increased from £17 million to £28 million, a
compound annual growth rate of 12%.
Partial exit and recapitalisation
In December 2015 HgCapital completed the recapitalisation and the sale of a
minority interest in JLA to a group of institutional investors, returning £116
million to HgCapital 6 clients, including £17.3 million of cash proceeds to
the Trust, and retained 59% of the equity in the company. These transactions,
together with previous realisations, took the total cash return to 1.8x the
original investment. The combined return represents an investment multiple of
3.5x over JLA's holding period to date.
OVERVIEW OF THE YEAR
NET ASSET VALUE (NAV)
During the year, the NAV of the Trust increased by £53.1 million, from £476.9
million to £530.0 million at 31 December 2015.
ATTRIBUTION ANALYSIS OF CURRENT MOVEMENTS IN NAV
Revenue£'000 Capital£'000 Total£'000
Opening NAV as at 1 January 2015 25,983 450,935 476,918
Realised capital and income proceeds from investment portfolio in excess of 31 December 2014 book value 4,990 8,427 13,417
Net unrealised capital and income appreciation of investment portfolio 25,778 65,804 91,582
Net realised and unrealised gains from liquid resources 309 9 318
Dividend paid (11,944) - (11,944)
Expenditure and taxation (3,931) - (3,931)
Investment management costs:
Priority profit share - current year charge (8,219) - (8,219)
Priority profit share - net loan allocation (1,020) 1,020 -
Carried interest - current year provision - (28,118) (28,118)
Closing NAV as at 31 December 2015 31,946 498,077 530,023
ANALYSIS OF NAV MOVEMENTS
For the year ended 31 December 2015
There were a number of underlying factors contributing to the above increase
in the NAV. Positive impacts on the NAV were the revaluation of the unquoted
portfolio (+£91.6 million) and uplifts on the realisation of investments
compared with their carrying value at the start of the year (+£13.4 million).
Reductions in the NAV were caused by: the payment of a dividend to
shareholders (-£11.9 million); the Manager's remuneration (-£8.2 million and a
-£28.1 million increase in the provision for future carried interest); and
operating expenditure and taxation (-£3.9 million).
REALISED AND UNREALISED MOVEMENTS IN INVESTMENT PORTFOLIOfor the year ended 31 December 2015
Investment name and ranking within investment portfolio at 31 December 2015
IRIS (2) 17.9
JLA (7) 17.6
Zenith (4) 15.4
TeamSystem (sold) 11.4
Visma (1) 7.9
P&I (5) 7.8
QUNDIS (9) 5.0
A-Plan (8) 4.4
Casa Reha (sold) 4.0
Hg6E 3.5
Allocate Software (17) 2.7
Frösunda (14) 2.5
Other 2.2
Sequel (22) 2.1
Intelliflo (21) 2.1
Teufel (23) 2.0
Parts Alliance (12) 2.0
Ullink (15) 1.9
Lumesse (16) (1.7)
Radius (11) (1.8)
NetNames (13) (1.9)
Achilles (6) (2.0)
During the year, the value of the unrealised portfolio increased by £106.5
million, excluding the provision for carried interest. The majority of the
increase (£70.3 million) relates to increases in profits in the underlying
portfolio. The other main driver of the increase in unrealised value came from
improved ratings, reflecting the positive re-rating for comparable businesses
(both listed and M&A), most notably in our software businesses.
These were partially offset by decreases driven by an increase in net debt
(-£25.9 million) resulting from refinancing that returned cash to the Trust,
and unfavourable foreign exchange movements (-£10.2 million).
TOP 20 PORTFOLIO TRADING PERFORMANCE as at 31 December 2015
The top 20 buyout investments (representing 87% of the total portfolio by
value) have delivered strong sales growth of 10% and EBITDA growth of 12% over
the last twelve months ('LTM').
We are pleased with the performance of the portfolio and, in particular, some
of the larger companies. Profits across the portfolio have grown at a faster
rate than revenues as the investment made into the cost base of a number of
our portfolio companies in previous periods bears fruit. Over the past three
years the top 20 have grown consistently at an average of 10% p.a. for both
sales and EBITDA. The business model characteristics of our portfolio
companies give us confidence that this level of growth can be achieved
consistently going forward.
We continue to see very robust trading performance from Visma, IRIS,
TeamSystem and P&I in our TMT portfolio and Parts Alliance, Radius, JLA and
Zenith in the Services sector. QUNDIS, a German based industrial company, has
also seen improved operational performance in 2015.
In total, 61% of the top 20 saw double-digit earnings growth over 2015.
We continue to invest materially into the cost base of a number of our
portfolio companies, including Ullink, Achilles, Sequel, The Foundry and
Intelliflo to: further strengthen management; improve sales and marketing
capabilities; and make other operational improvements, consequently depressing
short-term EBITDA and valuations. We expect to see the benefit of this
investment driving profitability in future years.
Similarly, many of our TMT companies, including IRIS, Visma and P&I, are
focused on investing in a shift towards 'cloud-based' recurring revenues,
temporarily holding back earnings but building businesses that should achieve
a premium rating at exit.
We fundamentally believe that the benefit of investment into our portfolio
companies will be long-term, high, sustainable growth, as we have delivered
before, and that this will position them well for future exits.
TOP 20 LTM SALES GROWTH: +10%
Growth rates LTM Sales£' million Number of investments within associated band % of top 20 portfolio by value within associated band
<0% p.a. 150 3 11%
0% to <10% p.a. 961 10 41%
10% to <15% p.a. 259 3 17%
≥15% p.a. 919 4 31%
TOP 20 LTM PROFIT GROWTH: +12%
Growth rates LTM EBITDA£' million Number of investments within associated band % of top 20 portfolio by value within associated band
<0% p.a. 43 4 13%
0% to <10% p.a. 135 5 26%
10% to <20% p.a. 260 5 41%
≥20% p.a. 79 6 20%
VALUATION AND GEARING ANALYSIS as at 31 December 2015
The portfolio's valuation policy is applied consistently, using the IPEV
Valuation Guidelines. Our valuation of each company has produced an average
EBITDA multiple for the top 20 buyout investments of 14.5x.
We continue to take a considered and prudent approach in determining the level
of maintainable earnings to use in each investment valuation. The majority of
the portfolio is valued using the LTM earnings to 30 November 2015, unless we
have anticipated that the outlook for the full current financial year is
likely to be lower, in which case we have used forecast earnings.
In selecting an appropriate multiple to apply to a company's earnings, we look
at a basket of comparable companies, primarily from the quoted sector, but
where relevant and recent, we will also use M&A data.
The average valuation multiple has risen over the year due to both increased
comparable business ratings and the continued shift in the mix of the
portfolio to higher growth businesses, in particular in the TMT sector where
we hold a number of companies with substantial opportunities to grow their
SaaS business.
2015 saw public markets stagnate, with many of their constituent sectors
significantly decreasing in value. The listed software sub-sector, however,
grew strongly over the year. This was further underpinned by M&A activity; for
example, our sale of TeamSystem, which was announced in December 2015, at a
multiple in excess of 17x EBITDA.
Our portfolio companies make appropriate use of gearing, with an average for
the top 20 of 4.6x LTM EBITDA. Many of our businesses have highly predictable,
strong earnings growth and are highly cash generative, enabling us to use debt
to gear our returns.
Over the past twelve months we have taken advantage of the buoyant debt
markets providing low cost financing on flexible terms for businesses with
these characteristics. During this period, we recapitalised Zenith, IRIS, JLA,
Sequel and Relay, returning £32.5 million to the Trust and subsequently, P&I
in the first quarter of 2016, returning a further £12.6 million.
TOP 20* EV TO EBITDA VALUATION MULTIPLE: 14.5x
EV to EBITDA bands EBITDA£' million Number of investments within associated band % of top 20* portfolio by value within associated band
7.0x to <10.0x 39 4 10%
10.0x to <12.0x 78 2 14%
12.0x to <15.0x 127 8 28%
15.0x to <17.0x 219 3 37%
17.0x to <18.0x 52 1 11%
*Excluding two investments valued on a basis other than earnings.
TOP 20 DEBT TO EBITDA RATIO: 4.6x
Debt to EBITDA bands Debt£' million Number of investments within associated band % of top 20 portfolio by value within associated band
(1.0x) to <3.0x 187 7 24%
3.0x to <4.0x 374 6 23%
4.0x to <5.0x 970 3 23%
5.0x to <7.0x 894 3 27%
≥7.0x 35 1 3%
OUTSTANDING COMMITMENTS OF THE TRUST
2015 ended with liquid resources of £40.3 million, supported by an undrawn
bank facility of £40.0 million. Outstanding commitments as at 31 December 2015
were £159.6 million as listed below. We anticipate that the majority of these
outstanding commitments will be drawn down over the next two to three years
and are likely to be partly financed by future cash flows from portfolio
realisations. The Trust additionally has the benefit of an opt-out provision
in its commitment to invest alongside HgCapital 7, so that it can opt out of
new investments without penalty, should it not have the cash available to
invest.
Fund Fund vintage Original commitment £'million Outstanding commitments as at 31 December 2015 Outstanding commitmentsas at 31 December 2014
£'million % of NAV £'million % of NAV
HGT 7 LP 2013 200.0 102.8 19.4% 146.9 30.8%
Hg Mercury 2011 60.0 27.5 5.2% 35.3 7.4%
HGT 6 LP 2009 285.0 17.9 3.4% 9.2 1.9%
RPP2 2010 29.51 8.2 1.5% 12.3 2.6%
HGT LP (Pre-HgCapital 6 vintage) pre-2009 120.02 1.3 0.2% 1.3 0.3%
RPP1 2006 15.93 1.0 0.2% 1.1 0.2%
Hg6E4 2009 15.0 0.9 0.2% 0.5 0.1%
Total 159.6 30.1% 206.6 43.3%
Liquid resources 40.3 7.6% 62.9 13.2%
Net outstanding commitments 119.3 22.5% 143.7 30.1%
unfunded by liquid resources
1 Sterling equivalent of E40.0 million. 2 Excluding any co-investment participations made through HGT LP.3 Sterling equivalent of E21.6 million.4 Partnership interest acquired during 2011.
Fund limited partnerships Residual cost£'000 Total valuation£'000 Portfolio value%
Primary mid-cap buyout funds:
1 HGT 6 LP 194,232 273,265 55.5%
HGT 6 LP - Provision for carried interest - (27,758) (5.7%)
2 HGT 7 LP 87,717 107,624 21.8%
3 HGT LP 67,528 78,599 16.0%
Total primary mid-cap buyout funds 349,477 431,730 87.6%
Primary small-cap buyout funds:
4 HgCapital Mercury D LP 24,784 33,774 6.9%
Total primary small-cap buyout funds 24,784 33,774 6.9%
Secondary mid-cap buyout funds:
5 HgCapital 6 E LP 7,481 14,684 3.0%
HgCapital 6 E LP - Provision for carried interest - (1,448) (0.3%)
Total secondary mid-cap buyout funds 7,481 13,236 2.7%
Total buyout funds 381,742 478,740 97.2%
Renewable energy funds:
6 HgCapital Renewable Power Partners 2 C LP 23,163 12,459 2.5%
7 HgRenewable Power Partners LP 4,724 1,425 0.3%
Total renewable energy funds 27,887 13,884 2.8%
Total investments net of carried interest provision 409,629 492,624 100.0%
Sector by value1 of primary buyout portfolio
66% TMT
23% Services
6% Industrials
5% Healthcare
Geographic spread by value1 of primary buyout portfolio
54% UK
17% Germany
15% Nordic Region
11% Italy
2% France
1% Switzerland
Investment vintage by value1 of primary buyout portfolio
11% 2015
19% 2014
20% 2013
6% 2012
15% 2011
29% pre 20112
Deal type by value1
91% Buyout
6% Buyout - small-cap
3% Renewable Energy
1Excluding carried interest provision
2Of which, 11% was sold after the year end
INVESTMENTS IN 2015
Over the course of the year, £521 million was invested on behalf of our
clients, with the Trust's share being £65 million.
The vast majority of our investments are generated by establishing and
developing relationships with companies in our chosen segments over the
longer-term and typically pursuing opportunities where we have a strong
relationship with a founder or management team. By doing this, we believe that
we can invest in the very best businesses within our chosen sub-sectors.
We continue to look for businesses that share similar underlying business
model characteristics such as: high levels of recurring revenues; a product or
service that is business-critical but typically low spend; low customer
concentration; and low sensitivity to market cycles. This is a theme that runs
through many of our new investments and we believe that these types of
companies will remain in high demand.
INVESTMENTS
The Foundry
The Foundry is a leading provider of award-winning software used globally by
creative professionals. We have known the company for several years and this
investment shares many of the characteristics that we look for, providing an
excellent platform for growth across a diversified client base, with a
commitment to innovation.
A-Plan
A-Plan is a leading UK insurance broker. The company is a strong fit with our
investment strategy, through its high level of recurring revenues, strong
customer loyalty and sector-leading customer advocacy, achieved through
excellent service.
EidosMedia
EidosMedia is a leading global provider of digital publishing solutions based
in Milan. The investment from HgCapital will enable EidosMedia to consolidate
its position in digital publishing solutions within the news media and
financial sectors, while continuing to work on a new generation of products
that offer unprecedented power and flexibility in digital content management
and delivery.
Achilles
In September, the Trust made a further investment into Achilles, a
UK-headquartered platform providing a cloud-based service enabling networks of
buyers to collect and validate supplier information. The Trust's investment is
to support the further growth of Achilles and as a co-investment is free of
fees and carried interest.
Eucon
Eucon is a leading provider of automotive parts pricing data and insurance
claims management services based in Germany. This investment results from
considerable sector work undertaken in recent years in automotive information
and software and follows prior investments in the automotive space including:
Epyx; Parts Alliance; and Zenith.
Zitcom
Zitcom and ScanNet are two leading Danish hosting and cloud solutions
providers. This investment is a continuation of HgCapital's considerable
experience in SME technology businesses in the wider Nordic region. The
acquisition by Zitcom of ScanNet completed post year-end.
INVESTMENTS SINCE THE YEAR-END
An estimated further £46 million invested on behalf of the Trust since 31
December 2015
Sovos Compliance
Sovos Compliance is a leading global provider of regulatory tax compliance
software, headquartered in Boston, USA. Having tracked the company for several
years, HgCapital assumed majority ownership from Vista Equity Partners, which
has retained a significant minority stake in the company, working alongside
the management team. HgCapital will support Sovos in its European expansion.
The Trust has co-invested alongside its core HgCapital 7 participation.
Citation
Citation is one of the UK's leading providers of Health & Safety, HR,
Employment Law and ISO services to SMEs. The Services Team has followed the
company for several years and continues their strategy of investing leading
technology-enabled professional services providers in regulatory-driven and
fast growing niches.
Kinapse
Kinapse is a UK-headquartered leading global provider of advisory, capability
building and operational services to the life sciences industries, focused on
regulatory compliance and quality. This fits with HgCapital's strategy of
investing in regulatory-driven services.
ScanNet
The ScanNet acquisition was made alongside Zitcom (described above). The
combination of these two businesses will create a business with a leading
position in the managed hosting markets for SMEs in Denmark.
Further details on the top 20 largest investments as at 31 December 2015 can
be found on pages 40 to 59 in the full Annual Report and Accounts.
REALISATIONS IN 2015
Over the course of the year, HgCapital has returned a total of £395 million to
its clients, including £64 million to the Trust.
It was a very active year for realisations. We have made several references to
'frothy' markets over the year and this has helped inform our approach to
selling investments whilst also carefully considering our appetite for selling
versus holding onto businesses for longer, as demonstrated by the sale of a
minority stake in JLA, which completed in December 2015. We have also taken
advantage of buoyant debt markets over 2015 by recapitalising investments
where we have good visibility of their future earnings, returning significant
cash proceeds to our clients, including the Trust, and we will continue to
assess further opportunities here.
FULL EXITS
SimonsVoss
SimonsVoss, a European leader in innovative electronic battery-powered locking
and access control systems headquartered in Germany, was sold to Allegion plc,
a listed global security products and solutions provider. The Trust realised
cash proceeds representing an uplift of 3% over the carrying value of the
Trust at 31 December 2014.
Sporting Index
Sporting Index is a UK-based premier sports spread betting and outsourced
sports trading services company. This company was one of our legacy Consumer
and Leisure investments and we worked hard to recover value. The sale was made
at an uplift of 47% over its carrying value at 31 December 2014.
PARTIAL EXIT
e-conomic
In an all share transaction, e-conomic, a Scandinavian SaaS accounting
solutions provider, was sold to Visma, a leading provider of business software
and outsourcing services to SMEs in the Nordic region and in which the Trust
already holds a substantial interest. The Trust has retained a stake in
e-conomic's international business and Debitoor.
PARTIAL EXIT AND RECAPITALISATION
JLA
HgCapital completed the sale of a minority interest to a group of
institutional investors and the recapitalisation of JLA, a leading UK provider
of business-critical asset maintenance services to SMEs. These transactions,
together with previous realisations, returned in total 1.8x of the original
investment, with HgCapital retaining about 59% of the equity in the company.
The combined return represents an investment multiple of 3.5x.
RECAPITALISATIONS
Zenith
In April, we recapitalised Zenith, on the back of its strong trading
performance, just over a year into our ownership of the business. The cash
realised on behalf of the Trust represented a return to date of 45% on the
original investment made.
IRIS
IRIS, a leading UK provider of business-critical software and services to the
UK accountancy market, was recapitalised over the period with the cash
proceeds to the Trust representing a 46% return on the original investment
made, a portion of which was received in 2016.
Sequel Business Solutions
In November, the Mercury Team completed the recapitalisation of Sequel, the
leading provider of applications software to the Lloyd's of London insurance
market. The cash realised on behalf of the Trust represented a return to date
of 49% on the original investment.
Relay Software
The recapitalisation of Relay, a leading provider of software and connectivity
to insurance brokers and underwriters in Ireland, represented a return to date
of 25% on the original investment.
REALISATIONS SINCE THE YEAR-END
An estimated further £59 million returned to the Trust post 31 December 2015
TeamSystem
TeamSystem, a leading provider of business-critical, regulatory driven
software products to accountants, HR professionals and SMEs in Italy, was sold
to Hellman & Friedman LLC. On completion, this transaction resulted in an
uplift of 34% (£11.4 million) over the carrying value of the Trust at 31
December 2014. The sale proceeds are fully reflected in the December 2015
valuation.
P&I
The Munich TMT Team have completed the recapitalisation of P&I with cash
proceeds realised on behalf of the
Trust. This represents a 60% return on the original investment made in
December 2013.
Casa Reha
Casa Reha, a leading private German provider of elderly care services, was
sold to Euronext-listed Korian. The Trust's cash proceeds on completion
represent an uplift of 104% (£4.0 million) over the carrying value of the
Trust at 31 December 2014. The sale proceeds are fully reflected in the
December 2015 valuation.
Further detail on the top 20 largest investments as at 31 December 2015 can be
found in the full Annual Report and Accounts.
SUMMARY OF INVESTMENT AND REALISATION ACTIVITY
INVESTMENTS MADE DURING THE YEAR1
Company Sector Geography Activity Cost£'000
The Foundry TMT UK Innovative software provider to creative professionals 17,177
A-Plan Services UK Independent insurance broker 14,573
EidosMedia TMT Italy Provider of digital publishing solutions 8,414
Eucon TMT Germany Provider of automotive parts pricing data 4,408
ZitCom TMT Nordic region Hosting and cloud solutions provider 3,771
New Investments 48,343
Achilles TMT UK Cloud-based validation supplier 10,000
RPP1 and RPP2 Renewable energy Europe Further capital calls 3,478
Other investments 3,668
Further Investments 17,146
Total investments on behalf of the Trust 65,489
REALISATIONS MADE DURING THE YEAR1
Company Sector Exit route Proceeds2£'000
SimonsVoss Industrials Trade sale 18,180
Sporting Index Consumer & Leisure Trade sale 3,699
Full realisations 21,879
JLA Services Refinancing and minority sale 17,345
Zenith Services Refinancing 10,774
IRIS TMT Refinancing 6,239
Sequel TMT Refinancing 2,162
HgCapital 6 E LP Fund Distribution received 1,691
RPP1 Fund Renewable energy Distribution received 1,272
Other 2,625
Partial realisations 42,108
Total realisations on behalf of the Trust 63,987
1 The numbers in this table relate to the Trust's share of underlying
transactions.
2 Includes gross revenue received during the year-ended 31 December 2015.
OUTLOOK
2015 was a busy and productive year at HgCapital. In last year's results we
commented on our confidence in the portfolio and this has been borne out with
strong trading performance in the portfolio during the year and a number of
realisations over the period for good value. We believe both trends are set to
continue.
The latter part of 2015 saw the signed exits of both Casa Reha and TeamSystem
(both of which completed in 2016) alongside the partial realisation of JLA;
all at attractive uplifts to the December 2014 carrying value. During the year
we completed a total of four realisations and five recapitalisations across
the entire HgCapital portfolio and we see a number of further opportunities to
return capital during 2016.
Given heightened ratings and a relatively buoyant market for realisations, we
are continuing our focus on returning capital to our investors. To this end, a
reasonable amount of thought and work is also going into our exit planning for
the rest of 2016 and beyond.
The start to 2016 has seen an extended period of equity market volatility.
This, combined with continued speculation on the future growth of China and
renewed concerns in relation to the state of the macro-economic environment,
has led to a sense of broader uncertainty ahead of the remainder of 2016.
In this type of market environment, we think the clarity of our investment
strategy confers a number of clear advantages to a disciplined buyer.
Specifically, we continue to focus on businesses that provide a
business-critical product or service, to a fragmented customer base,
benefiting from strong contracted or recurring revenues; this should enable us
to identify opportunities with the appropriate business model to generate
strong risk-adjusted returns for our clients. Companies with these
characteristics will eventually provide attractive opportunities for sale to
both trade and financial buyers.
Four of our most recent investments, EidosMedia, Sovos Compliance, Kinapse and
Citation, are all very clearly differentiated by their predictability and
resilience across market cycles. We remain disciplined in terms of the
sourcing of our new investments; deliberately and pro-actively pursuing those
opportunities where we have built many years of knowledge of the business and
a strong relationship with a founder or management team. Citation, for
example, was closely tracked by our Services Team for over four years prior to
our acquisition of the business in February 2016. Following this investment,
HgCapital 7 is almost 60% invested. We will continue to build our medium-term
pipeline over the next six months.
The portfolio has continued to trade strongly, delivering double digit revenue
and EBITDA growth over the course of the last twelve months. As we enter a
period of potential economic and political uncertainty, it is worth
remembering that HgCapital's portfolio grew revenues and profits every year
throughout the last financial crisis between 2008 and 2010: we believe that
the current portfolio is even stronger.
"The strong trading performance of our portfolio companies, combined with
further opportunities in the medium term to realise investments at attractive
valuations, will continue to drive value for shareholders."
Nic Humphries, Managing Partner of HgCapital
OVERVIEW OF THE UNDERLYING INVESTMENTS HELD THROUGH FUND LIMITED PARTNERSHIPS
Investments Fund Sector Location Year of investment Residualcost£'000 Totalvaluation5£'000 Portfolio value% Cum. value%
(in order of value)
1 Visma1 HGT 7/HGT 6/HGT TMT Nordic Region 2014 53,659 62,894 12.1% 12.1%
2 IRIS HGT 6 TMT UK 2011 25,598 56,376 10.8% 22.9%
3 TeamSystem (sold) HGT 6 TMT Italy 2010 24,432 45,078 8.6% 31.5%
4 Zenith HGT 6 Services UK 2013 16,245 37,293 7.1% 38.6%
5 P&I2 HGT 7/ HGT TMT Germany 2013 22,101 35,993 6.9% 45.5%
6 Achilles3 HGT TMT UK 2008 15,218 28,061 5.4% 50.9%
7 JLA HGT 6 Services UK 2010 3,511 20,678 4.0% 54.9%
8 A-Plan HGT 7 Services UK 2015 14,573 19,013 3.6% 58.5%
9 QUNDIS HGT 6 Industrials Germany 2012 12,540 18,180 3.5% 62.0%
10 The Foundry HGT 7 TMT UK 2015 17,177 17,514 3.4% 65.4%
11 Radius HGT 6 Services UK 2013 17,966 17,378 3.3% 68.7%
12 Parts Alliance HGT 6 Services UK 2012 10,495 12,557 2.4% 71.1%
13 NetNames HGT 6 TMT UK 2011 14,249 12,503 2.4% 73.5%
14 Frösunda HGT 6 Healthcare Nordic Region 2010 14,296 12,309 2.4% 75.9%
15 Ullink HGT 7 TMT France 2014 10,034 12,071 2.3% 78.2%
16 Lumesse HGT 6 TMT UK 2010 22,135 11,904 2.3% 80.5%
17 Allocate Software Mercury TMT UK 2014 5,890 8,849 1.7% 82.2%
18 EidosMedia HGT 7 TMT Italy 2015 8,414 8,669 1.7% 83.9%
19 Atlas HGT Services UK 2007 12,542 8,117 1.6% 85.5%
20 Casa Reha (sold) HGT Healthcare Germany 2008 8,990 7,770 1.5% 87.0%
21 Intelliflo Mercury TMT UK 2013 4,014 7,227 1.4% 88.4%
22 Sequel Mercury TMT UK 2014 2,252 6,503 1.2% 89.6%
23 Teufel HGT 6 Industrials Germany 2010 10,799 6,477 1.2% 90.8%
24 SFC KOENIG HGT Industrials Switzerland 2008 5,829 4,750 0.9% 91.7%
25 Eucon Mercury TMT Germany 2015 4,408 4,361 0.8% 92.5%
26 Zitcom Mercury TMT Nordic Region 2015 3,771 3,822 0.7% 93.2%
27 Mainio Vire HGT 6 Healthcare Nordic Region 2011 8,307 3,012 0.6% 93.8%
28 Relay Mercury TMT Rep of Ireland 2014 1,800 2,580 0.5% 94.3%
29 Valueworks Mercury TMT UK 2012 2,649 432 0.1% 94.4%
Non-active investments4 (4) HGT 6/HGT 367 891 0.1% 94.5%
Total buyout investments (33) 374,261 493,262 94.5%
Other buyout investments Hg6E 7,481 14,684 2.8% 97.3%
Renewable energy RPP1/RPP2 Renewable energy 27,887 13,884 2.7% 100.0%
Total investments 409,629 521,830 100.0%
1 Investment through HGT 7 LP, HGT 6 LP (following
sale of e-conomic) and co-investment participation
through HGT LP.2 Investment through HGT 7 LP and
co-investment participation through HGT LP.3
Investment and co-investment participation through
HGT LP.4 Residual ownerships in holding company
structures, following earlier realisations of
underlying operating company groups, awaiting
liquidation and final proceeds.5 Including accrued
income but before the provision for carried
interest of £29,206,000.
NON-STATUTORY ACCOUNTS
The financial information set out below does not constitute the Company's
statutory accounts for the years ended 31 December 2014 and 2015 but is
derived from those accounts. Statutory accounts for 2014 have been delivered
to the Registrar of Companies, and those for 2015 will be delivered in due
course. The Auditors have reported on those accounts; their report was (i)
unqualified, (ii) did not include a reference to any matters to which the
Auditors drew attention by way of emphasis without qualifying their report and
(iii) did not contain a statement under Section 498 (2) or (3) of the
Companies Act 2006. The text of the Auditors' report can be found in the
Company's full Annual Report and Accounts at www.hgcapitaltrust.co.uk
FINANCIAL STATEMENTS
INCOME STATEMENTFOR THE YEAR ENDED 31 DECEMBER 2015
Notes Revenue return Capital return Total return
2015£'000 2014£'000 2015£'000 2014£'000 2015£'000 2014£'000
Gains on investments, government securities and liquidity funds 13 - - 46,122 34,752 46,122 34,752
Gains/(losses) on priority profit share loans recovered 5(b) - - 1,020 (2,435) 1,020 (2,435)
from/(advanced to) General Partners
Net income 4 21,838 24,168 - - 21,838 24,168
Other expenses 6(a) (2,560) (1,614) - - (2,560) (1,614)
Net return before finance costs and taxation
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