REG - HG Capital Trust PLC - Annual Financial Report <Origin Href="QuoteRef">HGT.L</Origin> - Part 2
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appropriate measurement standards for environmental impact; and
• Do more with less - reduce their impact on natural resources.
HOW WE INTEGRATE RESPONSIBLE INVESTING INTO OUR INVESTMENT PROCESS
Investment screening
• When considering potential new investments, we screen them against an
exclusion list, which identifies the sectors, businesses and activities in
which we will not invest.
• A red flag report identifies high level concerns arising from sectors,
geographies and preliminary diligence results.
Diligence
• During diligence, we assess companies for compliance with relevant laws in
relation to environmental, social, governance, health and safety, bribery and
corruption issues.
• As part of this process, we carry out a specific review detailing risks and
opportunities for improvement within our framework.
Ownership
• Our Portfolio Management Team works with companies to implement initiatives
and new processes, and support them in realising their ambitions within and
beyond our framework.
PRI - Principles for Responsible Investment A signatory to the UNPRI since
2012.
Green Investment Bank
HgCapital actively collaborates with a number of organisations on ESG
initiatives and shares best practice in this area.
Our aim is to facilitate an ongoing dialogue where shared experiences can be
mutually beneficial.
RESPONSIBLE INVESTING CASE STUDY: JLA
JLA is a UK-based Critical Asset Supply & Service business offering end-to-end
solutions in laundry, catering, infection control, compliance & safety and
consumables. JLA operates across a diverse sector, offering customers a fully
inclusive machine supply and breakdown service proposition under the name of
Total Care, as well as other supplementary products and services such as
service solutions and equipment sales.
ENVIRONMENT
Helping our customers become more energy efficient
OTEX
• JLA's OTEX ozone disinfection system uses ozone, one of nature's best
natural disinfectants. It works best in cool temperatures leaving less
moisture in linens leading to shorter drying cycles. By using less water and
heat, the laundry room consumes less energy, reducing utility bills and
operating costs dramatically, whilst still ensuring robust infection control.
• In addition, ozone does not harm the environment. It has a very short
half-life, breaking down into oxygen once its job is done.
SMART
• JLA's SMART Wash and SMART Dry ranges cut water, energy and detergent use
by up to a third, giving customers a greener and cheaper operation.
• SMART Wash uses JLA Sense - an integrated laundry 'brain' that determines
the minimum water and detergent needed, saving up to 32% compared with a
conventional washing machine, whilst still ensuring optimum wash quality.
• The SMART Dry range uses a two-phase heating process which cuts the time
and energy needed for air to reach optimum drying temperature.
Working to protect our environment
In addition to helping customers become more energy efficient, JLA takes its
responsibility to create a sustainable workplace very seriously, with the
following initiatives:
• A programme of replacement for old IT equipment and lighting with more
energy efficient versions;
• A vehicle tracking system dispatches the most appropriate engineer to a
customer, reducing fuel consumption;
• ESOS compliant;
• HQ electricity is powered solely by renewable energy; and
• A CO2 cap on company cars.
SOCIAL
Apprenticeship Scheme
JLA have run a successful engineer apprenticeship scheme since 2011.
Apprentices learn the skills they need to succeed and work closely with an
external training company, so that they get both on-the-job training and
official qualifications.
With the training and support JLA give apprentice engineers, once they
complete their courses, they expect to go on to become fully fledged members
of the JLA team.
NVQ
Within the last 12 months over 30 JLA employees have undertaken NVQ courses,
and every one of them received a qualification. JLA has an ongoing programme
to upskill team members to keep them growing in line with the business.
Diversity
JLA is committed to creating a culture that values its people and operates
with mutual trust and respect. JLA's employment policies and practices reflect
a culture where decisions are made based on individual ability and potential
in relation to the needs of the business. This is seen as a factor in JLA's
success.
Community sponsoring
JLA is committed to creating a positive impact within the community and with
its customers, regularly supporting local events and sports teams and
providing charitable donations to support customer fundraising initiatives.
GOVERNANCE
Business Principles
JLA's business principles are designed to ensure that all staff work towards
the same goals and guard against damage to JLA's collective or individual
reputations. In outlining their beliefs and expectations from an early stage,
JLA promotes best practice from the day an employee joins the company. The
principles are readily available on www.jlagroup.com.
Cash Collection
JLA's Total Care Vend Share division outsourced their cash collection
operation to minimise business risk and improve employee safety. All cash is
now returned daily to highly secure unmarked cash centres to reduce cash
handling time.
This process minimises the number of people in contact with cash, greatly
improving JLA's accounting and audit trail.
CASE STUDY - P&I
Website: www.pi-ag.com
Sector: TMT
Geography: Germany
"We thank the HgCapital team for its support which helped us become a leading
HR software provider in the DACH region and we appreciate its continuous
investment as a strong sign of confidence in our growth prospects."
Vasilios Triadis, CEO of P&I
Business description
Founded in 1968 and headquartered in Wiesbaden, Germany, P&I (Personal &
Informatik AG) supplies payroll and HR-related software to mid-market
companies and the public sector primarily in Germany, Austria and Switzerland.
P&I also serves customers across thirteen countries in Europe via its
partners.
Over the course of more than four decades, P&I products have been enriched
with information from the highly diverse tasks and best practices of more than
15,000 customers (of whom 3,900 are direct). The business offers software for
the management of payroll, workforce, time management, human capital
management and HR analytics.
It typically serves "Mittelstand" businesses with 200-5,000 employees, across
a range of industries, as well as medium-sized and large public sector
customers. It employs more than 400 people with offices in Austria,
Switzerland, Slovakia and the Netherlands and it has partners in nine
additional European countries.
The investment
The regulatory driven software space was first identified by HgCapital as an
attractive sub-sector in 2002 and the investment in P&I followed a decade of
tracking the business, enabling HgCapital to build a strong relationship with
the business' management over time and conduct thorough due diligence through
the economic cycle. The investment in P&I is typical of HgCapital's approach
to sourcing, origination and the business model characteristics which remain
HgCapital's focus.
The business had seen strong operating performance with a historical 10-year
track record of consistent revenue and EBITDA growth, with low sensitivity to
economic market cycles. In December 2013, HgCapital, co-investors and the
business' management acquired 92% of shares in P&I from Carlyle. The implied
EV of the business was E438.0 million.
The investment case
HgCapital continues to see attractive long-term growth in the European payroll
and transactional HR sector for leading, innovative players. P&I displays
specific characteristics that HgCapital looks for in its portfolio companies:
a scalable business model with a broad, diversified customer base; strong
customer loyalty; and a significant share of recurring revenues, driven by
ongoing regulatory changes. As a driver of innovation in HR technology, P&I is
highly rated among its customers for the quality of its products.
We also saw the opportunity to continue to develop P&I's product offerings,
including the addition of further Human Capital Management functionality, the
strengthening of its recurring revenue base and the increasing adoption of its
cloud service technology (P&I Big Data) into their customer base. There was
also potential for small M&A opportunities in the relatively fragmented HR
management systems, payroll, time management and expenses markets, both in the
DACH region and internationally.
How HgCapital has supported P&I
With HgCapital's support, P&I acquired a Swiss payroll vendor, Soreco HR, in
2015. In addition to growth and product development, HgCapital focused on
strengthening P&I's financial and operating reporting, as well as defining the
company's forward business plan.
The roll-out of Big Data was very successful with adoption rates of more than
90%, driving year-on-year growth in recurring revenue in excess of 6% in 2016
to 22% year-to-date FY2017. The move into Big Data has also had a positive
effect on the operating efficiency of the business, driving increases in
average sales licence revenue per employee and average consulting EBITDA
revenue margin to 44% in 2017.
Performance improvement
Over our investment period, P&I saw compound annual EBITDA growth of 16% p.a.
P&I continues to perform well and saw high single digit revenue growth, 22%
growth in recurring revenues and 17% EBITDA growth over the 2017 financial
year to date. This has been driven by strong sales to both existing and new
customers with growth in high margin revenue streams (e.g. licence,
maintenance and Big Data) leading to margin expansion. In addition, P&I has
made significant progress in shifting its customer base to its cloud service
technology, P&I Big Data, which is expected to further improve efficiency and
scalability for both P&I and its customers.
Exit and refinancing
In January 2016, we completed the refinancing of P&I, returning 60% of the
original investment made in December 2013 to clients. In November 2016, we
completed the sale of P&I to a company backed by funds of Permira, an
international investment firm. The combined return represents an investment
multiple of 2.3x cost and a 37% gross IRR over P&I's holding period to date.
HgCapital has retained a minority position of E70 million in P&I; the
Company's share of this is valued at £6.6 million.
Investment return multiple of cost: 2.3x
Gross IRR: 37% p.a.
OVERVIEW OF THE YEAR
NET ASSET VALUE (NAV)
During the year, the NAV of the Company increased by £85.8 million, from
£530.0 million to £615.8 million at 31 December 2016.
ATTRIBUTION ANALYSIS OF MOVEMENTS IN NAV
Revenue£'000 Capital£'000 Total£'000
Opening NAV as at 1 January 2016 31,946 498,077 530,023
Net unrealised capital and income appreciation of investment portfolio 32,615 88,181 120,796
Realised capital and income proceeds from investment portfolio in excess of 31 December 2015 book value 1,870 15,487 17,357
Net realised and unrealised gains from liquid resources 347 75 422
Dividend paid (14,930) - (14,930)
Expenditure (2,605) - (2,605)
Taxation (581) - (581)
Investment management costs:
Priority profit share - current year charge (7,650) - (7,650)
Priority profit share - net loan allocation (3,856) 3,856 -
Carried interest - current year provision - (27,076) (27,076)
Closing NAV as at 31 December 2016 37,156 578,600 615,756
ANALYSIS OF NAV MOVEMENTS for the year ended 31 December 2016
There were a number of underlying factors contributing to the increase in the
NAV. Positive impacts on the NAV were the £120.8 million revaluation of the
unquoted portfolio and uplifts of £17.4 million on the realisation of
investments compared with their carrying value at the start of the year.
Reductions in the NAV included: the payment of a £14.9 million dividend to
shareholders and HgCapital's remuneration (£7.7 million and a £27.1 million
increase in the provision for future carried interest).
REALISED AND UNREALISED MOVEMENTS IN INVESTMENT PORTFOLIOfor the year ended 31 December 2016
Investment name and ranking by value within investment portfolio at 31 December 2016 £' million
Visma (1) 31.2
Sovos Compliance (4) 19.0
Hg Mercury 17.6
QUNDIS (5) 15.7
P&I (26) 15.1
Zenith (sale agreed Jan '17) 10.9
IRIS (2) 9.1
Ullink (11) 8.7
Radius (7) 6.7
JLA (6) 3.9
A-Plan (8) 3.4
Hg6E 2.8
Renewable energy 2.7
Other 2.5
Parts Alliance (14) 2.0
TeamSystem (22) 1.8
NetNames (sold) 1.7
EidosMedia (24) (1.8)
Teufel (32) (3.6)
Atlas (31) (4.3)
Achilles (10) (6.9)
ATTRIBUTION ANALYSIS OF MOVEMENTS IN THE INVESTMENT PORTFOLIO
During the year, the value of the unrealised portfolio increased by £106.7
million, excluding the provision for carried interest. The majority of the
increase (£90.5 million) relates to increases from profit growth in the
underlying portfolio and £48.1 million of positive foreign exchange
movements.
These were partially offset by £14.1 million of decreases driven by
realisations at carrying value net of acquisitions and an increase in net debt
of £13.9 million resulting from refinancings that returned cash to the Company
and further M&A activity within the portfolio.
TOP 20 PORTFOLIO TRADING PERFORMANCE as at 31 December 2016
The top 20 buyout investments (representing 83% of the total portfolio by
value) have delivered strong sales growth of 11% and EBITDA growth of 21% over
the last twelve months ('LTM').
This demonstrates consistent robust growth in the portfolio with revenues and
EBITDA growing on average by 11% and 14% p.a. respectively over the last three
years. The business model characteristics of these companies give us
confidence that this double-digit growth can be achieved consistently going
forward.
More than 70% of the portfolio is seeing strong double-digit revenue growth,
with close to 80% of the portfolio delivering EBITDA growth in excess of 10%
over the last twelve months.
Profits across the portfolio have grown at a faster rate than revenues, as the
investment made over the last few years into the cost base of a number of our
companies, to finance increased sales and marketing capabilities, strengthen
management and new product development, bears fruit.
We continue to see very robust double-digit trading performance from Visma,
IRIS, Sovos Compliance and Allocate Software in the TMT portfolio and Zenith
and Citation in the Services sector.
As reported at the half year, QUNDIS, a German based industrial company, has
continued to perform very well and is delivering strong growth versus prior
year, driven by superior product features, new customer wins and increasing
market share.
Significant M&A undertaken by Ullink in 2014 and subsequent investment into
the company has delivered synergies resulting in very robust earnings growth
over the last twelve months.
Achilles, one of our SaaS businesses, is focused on driving recurring revenue
growth, adding significant costs to improve sales and marketing capabilities
and consequently, this has significantly depressed EBITDA growth over 2016.
The market opportunity for Achilles remains significant.
With strong earnings growth and cash generation across the portfolio, we
believe that this will continue to drive equity value in our investments.
TOP 20 LTM SALES GROWTH: +11%
Growth rates LTM Sales Number of investments within associated band % of top 20 portfolio by value within associated band
£' million
<0% p.a. 115 2 6%
0% to <10% p.a. 937 6 21%
10% to <15% p.a. 356 5 31%
≥15% p.a. 1289 7 42%
TOP 20 LTM PROFIT GROWTH: +21%
Growth rates LTM EBITDA Number of investments within associated band % of top 20 portfolio by value within associated band
£' million
<0% p.a. 29 3 8%
0% to <10% p.a. 123 4 15%
10% to <20% p.a. 119 3 24%
≥20% p.a. 379 10 53%
VALUATION AND GEARING ANALYSIS as at 31 December 2016
The portfolio's valuation policy is applied consistently, in accordance with
the IPEV Valuation Guidelines. Each company has been valued individually,
resulting in an average EBITDA multiple for the top 20 buyout investments of
14.2x (14.5x at 31 December 2015).
We continue to take a considered and prudent approach in determining the level
of maintainable earnings to use in each valuation. The majority of the
portfolio is valued using the LTM earnings to 30 November 2016, 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.
Almost 41% of the top 20 by value has a multiple of just over 16x (Sovos
Compliance, Visma and IRIS). All have attractive business models, are growing
strongly and generating cash, and are in demand from investors.
There remains a 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.
Our portfolio companies make appropriate use of gearing, with an average for
the top 20 of 4.1x LTM EBITDA. Many of our businesses have highly predictable,
strong earnings growth and are very cash generative, enabling us to use debt
to gear our returns.
The year has seen significant increases in valuations in the portfolio. These
were driven by strong trading performance in the underlying portfolio and
additional gains from currency movement, reversing the losses seen in the past
three years.
TOP 20* EV TO EBITDA VALUATION MULTIPLE: 14.2x
EV to EBITDA bands EBITDA£' million Number of investments within associated band % of top 20* portfolio by value within associated band
8.0x to <12.0x 123 4 19%
12.0x to <14.0x 129 4 21%
14.0x to <15.0x 63 4 13%
15.0x to <16.0x 31 3 6%
16.0x to <16.5x 287 3 41%
*Excluding two investments valued on a basis other than earnings.
TOP 20 DEBT TO EBITDA RATIO: 4.1x
Debt to EBITDA bands Debt£' million Number of investments within associated band % of top 20 portfolio by value within associated band
0.0x to <3.0x 619 7 39%
3.0x to <4.0x 447 5 22%
4.0x to <6.0x 618 4 17%
6.0x to <7.0x 538 3 10%
7.0x to <8.0x 422 1 12%
OUTSTANDING COMMITMENTS OF THE COMPANY
2016 ended with liquid resources of £46 million, supported by an undrawn bank
facility of £80 million. Outstanding commitments as at 31 December 2016 were
£421 million, as listed below. We anticipate that the majority of these
outstanding commitments will be drawn down progressively over the next five
years and are likely to be partly financed by future cash flows from portfolio
realisations. Additionally, to mitigate the risk of being unable to fund any
draw-down under its commitments to invest alongside certain of HgCapital's
funds, the Board has negotiated a right to opt out, without penalty, of the
Company's obligation to fund such commitments where certain conditions exist.
A new commitment of £80 million to HgCapital Mercury 2 was made in February
2017 that is not shown in the table below. This commitment also has the
benefit of an opt-out provision.
Fund Fund Original commitment £'million Outstanding commitments as at 31 December 2016 Outstanding commitments as at 31 December 2015
vintage
£'million % of NAV £'million % of NAV
HGT 8 LP1 2017 350.0 350.0 56.9% - -
HGT 7 LP 2013 200.0 39.8 6.5% 102.8 19.4%
HGT 6 LP 2009 285.0 11.0 1.8% 17.9 3.4%
Hg Mercury 2011 60.0 10.3 1.7% 27.5 5.2%
RPP2 2010 34.12 7.5 1.2% 8.2 1.5%
HGT LP (Pre-HgCapital 6 vintage) pre-2009 120.03 1.3 0.2% 1.3 0.2%
RPP1 2006 18.54 0.8 0.1% 1.0 0.2%
Hg6E5 2009 15.0 0.6 0.1% 0.9 0.2%
Total 421.3 68.5% 159.6 30.1%
Liquid resources 45.8 7.4% 40.3 7.6%
Net outstanding commitments unfunded by liquid resources 375.5 61.1% 119.3 22.5%
1 Commitment to HgCapital 8 in December 2016. This fund will only commence investing once HgCapital 7 has completed its investment period.2 Sterling equivalent of E40.0 million. 3 Excluding any co-investment participations made through HGT LP. 4 Sterling equivalent of E21.6 million.5 Partnership interest acquired during 2011.
COMMITMENTS AT 31 DECEMBER 2016 - REMAINING INVESTMENT PERIOD
£'million
21.2 Investment period completed, remaining funds for follow-on investment.
50.1 Funds coming towards the end of their investment period.
350.0 HgCapital 8 commitment. This fund will only commence investing once HgCapital 7 has completed investing. The Company's commitment will be drawn down over four to five years.
421.3 Total
INVESTMENT PORTFOLIO OF THE COMPANY
Fund limited partnerships Residual cost£'000 Total valuation£'000 Portfolio value%
Primary buyout funds:
1 HGT 6 LP 152,700 273,296 47.8%
HGT 6 LP - Provision for carried interest - (38,603) (6.7%)
2 HGT 7 LP 138,527 185,585 32.4%
HGT 7 LP - Provision for carried interest - (11,751) (2.1%)
3 HGT LP 61,422 77,986 13.7%
4 HgCapital Mercury D LP 37,528 59,058 10.3%
HgCapital Mercury D LP - Provision for carried interest - (3,910) (0.7%)
Total primary buyout funds 390,177 541,661 94.7%
Secondary buyout funds:
5 HgCapital 6 E LP 5,175 14,448 2.5%
HgCapital 6 E LP - Provision for carried interest - (2,018) (0.4%)
Total secondary buyout funds 5,175 12,430 2.1%
Total buyout funds 395,352 554,091 96.8%
Renewable energy funds:
6 HG RPP2 Fund 24,692 16,997 3.0%
7 Hg RPP Fund 4,776 1,153 0.2%
Total renewable energy funds 29,468 18,150 3.2%
Total investments net of carried interest provision 424,820 572,241 100.0%
Sector by value* of primary buyout portfolio
61% TMT
31% Services
6% Industrials
2% Healthcare
Geographic spread by value* of primary buyout portfolio
54% UK
19% Nordic Region
11% Other Europe
9% Germany
7% USA
Investment vintage by value* of primary buyout portfolio
21% 2016
9% 2015
22% 2014
16% 2013
8% 2012
24% pre 2012
Analysis by value* of investment return relative to its original cost
91% Above
9% Below
Representing aggregate realised proceeds and unrealised valuations of an
investment
*Excluding carried interest provision
INVESTMENTS IN 2016
Over the course of the year, £963 million was invested on behalf of our
clients, with the Company's share being £104 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 company
will remain in high demand.
During 2016, the Company has invested £13.0 million (Sovos Compliance and
CogitalGroup) by way of co-investment, in addition to its commitment to invest
alongside HgCapital 7. This is an attractive way to invest more funds, when
available, with no fees or carried interest being payable.
NEW INVESTMENTS
Sovos Compliance
Sovos Compliance is a leading global provider of tax compliance software,
headquartered in Boston, USA. Having tracked the company for several years,
HgCapital acquired a majority ownership from Vista Equity Partners, which
retained a significant minority stake in the company, alongside the management
team. It displays a number of the investment characteristics we target,
providing business-critical software with highly recurring revenues.
Kinapse
Kinapse is a UK-headquartered global provider of regulatory and compliance
services to the life sciences industries.
The Services Team has followed Kinapse closely for several years and this
investment fits with HgCapital's strategy of investing in leading
regulatory-driven services.
Citation
Citation is one of the UK's top providers of Health & Safety, HR, Employment
Law and ISO services to SMEs.
The Services Team has followed Citation for several years and this investment
fits HgCapital's strategy of investing in leading technology-enabled
professional services providers in regulatory-driven and fast growing niches.
Trace One
Trace One is a SaaS-based platform for the design and management of private
label products, and operates a platform allowing retailers to develop and
exchange private label product specifications with their suppliers.
Headquartered in Paris, Trace One serves customers across Europe and North
America.
Trace One fits HgCapital's strategy of investing in companies with
subscription revenues in regulatory-driven growth niches and working with
founder entrepreneurs looking to transition their businesses to the next stage
of ownership.
Raet
Raet is a provider of HR cloud software and services headquartered in
Amersfoort, the Netherlands, and serving more than 10,000 business customers
internationally.
This investment is a continuation of HgCapital's theme of investing in leading
payroll and HR-related businesses. The TMT Team has followed Raet closely for
more than five years, building a strong relationship with the new management
team, and will now work closely with them to accelerate Raet's robust organic
growth.
Mobyt
Established in 2002, Mobyt provides Application-to-Person SMS services to a
range of large businesses and SMEs in Italy and France. Mobyt is headquartered
in Ferrara, Italy.
Mobyt serves c. 28,000 companies and sends one in every four
application-to-person SMS messages in Italy. The business displays many of the
characteristics HgCapital looks for, including a fragmented sector and
customer base and high customer loyalty in an area which is seeing strong
growth.
STP
STP is a key provider of specialist software to insolvency administrators and
law practices. STP employs c.180 people, serving over 1,200 customers, and has
offices in Germany and Switzerland.
The company shares many of the business model characteristics that the
HgCapital teams look for in an investment, including strong recurring revenues
with a product that is critical to its loyal customer base and a strong
management team.
CogitalGroup
CogitalGroup is a pan-European provider of outsourcing, accountancy, payroll,
taxation, financial and other advisory services, to SMEs. The business was
formed from three investments completed in 2016: Baldwins and Blick
Rothenberg, based in the UK; and Azets (formerly Visma BPO), active throughout
the Nordic region.
This investment continues the Services team's record of investing in
regulatory-driven businesses. It addresses several attractive business model
criteria, including: high repeatable revenues; high retention rates;
opportunity for margin improvement; fragmented customer base; and significant
M&A opportunities.
Evaluate
Evaluate is a London-headquartered provider of commercial intelligence to the
global life sciences industry, including all of the top 25 pharmaceutical
companies.
Evaluate is another example of the Mercury team's approach to investing in
technology businesses occupying growing niches, typically led by founders
looking to scale their business.
The company exhibits a number of the business model characteristics that
HgCapital seeks, including: a focus on recurring subscription contracts; a
track record of consistent double-digit revenue growth; high levels of
customer advocacy and operating within a segment with long term growth
potential.
NEW INVESTMENT COMPLETED SINCE THE YEAR-END
fundinfo
fundinfo is a leading technology platform for fund data and documents
publication and dissemination to the global fund management industry
(including banks, insurance companies, financial advisors, family offices and
platforms), headquartered in Zurich, Switzerland.
fundinfo will join HgCapital's current network of European headquartered
FinTech investments, including Intelliflo (SaaS financial advisor software),
Ullink (connectivity and trading software) and Sequel (insurance software and
analytics).
The Company will contribute a total £3.1 million to this investment.
Further details on investments as at 31 December 2016 can be found in the full
Annual Report and Accounts.
REALISATIONS IN 2016
Over the course of the year, HgCapital has returned a total of £1.1 billion to
its clients, including £136 million to the Company.
It was a very active year for realisations. We made several references to
'frothy' markets in 2015 and this has helped inform our approach to selling
investments, whilst also carefully considering our appetite for selling versus
the benefits of holding onto selected businesses for longer. We have also
taken advantage of buoyant debt markets during 2016 by refinancing investments
where we have good visibility of their future earnings, returning cash
proceeds to our clients, including the Company, and we will continue to assess
further opportunities here.
EXITS
P&I
In November 2016, we competed the partial sale of P&I, a supplier of payroll
and HR-related software to SMEs, to a company backed by funds managed by
Permira, an international investment firm.
This transaction resulted in an uplift of 42% over the carrying value of the
investment at 31 December 2015.
A case study of this investment appears above.
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, the Company realised cash proceeds of £39.2 million which were
fully reflected in the December 2015 valuation.
NetNames
In August 2016, the TMT Team completed the sale of NetNames, a leading
provider of global brand protection and internet domain name management
services, to CSC, a US-based provider of business administration services to
corporations.
This transaction resulted in an uplift of 14% over the carrying value of the
investment at 31 December 2015.
Casa Reha
Casa Reha, a private German provider of elderly care services, specialising in
high quality, assisted living, was sold to Euronext-listed Korian, a European
provider of elderly health care services.
On completion, the Company realised cash proceeds of £7.8 million which were
fully reflected in the December 2015 valuation.
SFC KOENIG
In July 2016, the Munich Team announced the sale of SFC KOENIG, a
Switzerland-based provider of high-quality, sealing and flow control
technology, to IDEX, a producer of highly engineered fluidics systems and
components in the USA.
This transaction resulted in an uplift of 12% over the carrying value of the
investment at 31 December 2015.
Relay Software
In August 2016, the Mercury Team announced the sale of Relay Software, a
provider of software to insurance brokers, underwriters and insurers in the
Republic of Ireland, to Applied Systems, a US-based, global provider of
cloud-based insurance broker management software.
This transaction resulted in an uplift of 73% over the carrying value of the
investment at 31 December 2015.
Mainio Vire
In June 2016, we agreed the sale of Mainio Vire, a provider of elderly care,
mental health and home services in Finland, to Mehiläinen. Mehiläinen is a
private provider of social and health care services, also based in Finland.
This transaction resulted in an uplift of 45% over the carrying value of the
investment at 31 December 2015.
REFINANCINGS
Intelliflo
In December 2016, the Mercury team completed the refinancing of Intelliflo, a
UK SaaS provider of software solutions to IFAs.
This represents a 50% cash return on the original investment made in August
2013.
Zitcom
In September 2016, the Mercury team completed the refinancing of Zitcom, a
leading Danish provider of hosting and cloud solutions.
This represents a 40% cash return on the original investment made in December
2015.
Allocate Software
In May 2016, the Mercury Team completed the refinancing of Allocate Software,
a key provider of healthcare rostering software.
This represents a 30% cash return on the original investment made in December
2014.
REALISATIONS SINCE THE YEAR-END
Zenith
In January 2017, we announced the sale of Zenith, the largest independent
vehicle leasing business in the UK, to Bridgepoint, in a transaction totalling
£750 million. The sale of Zenith delivers a 2.9x investment multiple and a 46%
gross IRR over the investment period.
On completion, expected in March 2017, the Company's share of this transaction
is estimated to result in cash proceeds of £59 million, an uplift of 22% over
the carrying value at 31 December 2016, adding 30 pence per share to the NAV.
Further detail on investments as at 31 December 2016 can be found in the full
Annual Report and Accounts.
SUMMARY OF INVESTMENT AND REALISATION ACTIVITY
INVESTMENTS MADE DURING THE YEAR
Company Sector Geography Activity Cost£'000
Sovos Compliance TMT USA Regulatory tax compliance software 24,284
CogitalGroup Services UK Accountancy, payroll, taxation, financial and other advisory services to SMEs 20,966
Raet TMT Netherlands HR cloud software and services 16,127
Citation Services UK Health & Safety, HR, employment law and ISO services to SMEs 10,068
Kinapse Services UK Life sciences outsourcing and advisory services 9,959
STP TMT Germany Software for insolvency administrators and legal practices 5,422
Trace One TMT France SaaS platform for the retail and private label goods 4,489
Mobyt TMT Denmark Application-to-Person SMS services 4,218
Evaluate TMT UK Commercial intelligence provider to the global life sciences industry 3,679
New investments 99,212
IRIS TMT UK Provider of accountancy software and services and payroll applications 4,455
Other 433
Further investments 4,888
Total investments on behalf of the Company 104,100
REALISATIONS MADE DURING THE YEAR
Company Sector Exit route Proceeds1£'000
P&I TMT Secondary sale 44,510
TeamSystem TMT Secondary sale 39,161
NetNames TMT Trade 14,232
Casa Reha Healthcare Trade 7,753
SFC KOENIG Industrials Trade 5,303
Relay Software TMT Trade 4,332
Mainio Vire Healthcare Trade 1,597
Full realisations 116,888
IRIS TMT Distribution received 5,315
HgCapital 6 E LP Fund Distribution received 3,439
Intelliflo TMT Refinancing 1,898
Allocate Software TMT Refinancing 1,796
Ullink TMT Distribution received 1,562
Zitcom TMT Refinancing 1,427
Other 3,164
Partial realisations 18,601
Total realisations on behalf 135,489
of the Company
1Includes gross revenue received during the year-ended 31 December 2016.
OUTLOOK
2016 has been a good year overall, and one which saw substantial progress
across the portfolio with strong trading performance and a number of
realisations at attractive valuations, despite a continuing uncertain economic
environment, exacerbated by the results of the EU referendum in the UK and the
presidential election in the US.
We have given much consideration to the UK's exit from the EU and our current
prognosis remains that this will have a relatively limited impact on the
portfolio, apart from instances where a currency mismatch exists between costs
and revenues for a small handful of our companies. More broadly, the
post-referendum environment has seen a general unwinding of historic currency
losses on non-sterling investments across our funds, benefiting valuations
over the year. Finally, we have also realised five portfolio companies since
the Brexit vote at the end of June 2016, with three of these based in the UK.
During 2016, we have continued to invest selectively in opportunities where we
have built many years of knowledge of the business and have a strong
relationship with a founder or management team. This has led to nine new
portfolio investments in the year, including: Sovos Compliance, a US based
provider of regulatory tax compliance software; Raet, the fourth payroll
software investment completed by HgCapital; STP, a provider of software for
insolvency administrators and law practices; and the investments in Visma BPO
(now renamed Azets), Baldwins and Blick Rothenberg forming the basis of the
newly launched CogitalGroup, a pan-European provider of outsourcing,
accountancy, payroll, taxation, financial and other advisory services to
SMEs.
Over 2016 we have returned more than £1 billion to our clients, including £136
million to HgCapital Trust from seven exits and four refinancings. The largest
of these were in relation to the realisations of TeamSystem, announced in late
2015, and P&I which completed in November 2016. Strong performance over the
year has continued to demonstrate the attractiveness of HgCapital portfolio
companies to both trade and financial buyers, as evidenced by the recent sale
of Zenith, announced in January 2017, at a multiple of 2.9x original cost. We
expect to return further capital over the course of 2017, from a combination
of both exits and refinancings.
In terms of leverage on new investments, all of our key UK and European
relationship banks remain committed to the market generally and focused on
maintaining close relationships with HgCapital.
Trading over the year has continued to generate double-digit revenue and
EBITDA growth across the portfolio with a material acceleration in the rate of
profit growth. Given the portfolio's defensive characteristics and focus on
protected business models, we believe our investments are well positioned to
see strong growth on an absolute and relative basis going forward, even if
macro-economic conditions deteriorate.
In this type of market environment, we believe that the clarity of our
investment strategy confers a number of clear advantages to a disciplined
buyer. Specifically, we will continue to focus on investing in businesses that
provide a business-critical product or service, to a fragmented customer base,
and 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.
OVERVIEW OF THE UNDERLYING INVESTMENTS HELD THROUGH FUND LIMITED PARTNERSHIPS
Investments Fund Sector Location Year of investment Residualcost£'000 Totalvaluation4£'000 Portfolio value% Cum. value%
(in order of value)
1 Visma1 HGT 7/HGT 6/HGT TMT Nordic region 2014 52,940 94,065 15.0% 15.0%
2 IRIS HGT 6 TMT UK 2011 26,109 64,657 10.3% 25.3%
3 Zenith (sale agreed Jan'17) HGT 6 Services UK 2013 16,245 48,207 7.7% 33.0%
4 Sovos Compliance2 HGT 7/HGT TMT USA 2016 24,284 43,272 6.9% 39.9%
5 QUNDIS HGT 6 Industrials Germany 2012 12,540 33,844 5.4% 45.3%
6 JLA HGT 6 Services UK 2010 3,511 24,619 3.9% 49.2%
7 Radius HGT 6 Services UK 2013 17,966 24,073 3.8% 53.0%
8 A-Plan HGT 7 Services UK 2015 14,573 22,461 3.6% 56.6%
9 CogitalGroup2 HGT 7/HGT Services UK 2016 20,966 21,572 3.4% 60.0%
10 Achilles3 HGT TMT UK 2008 15,218 21,125 3.4% 63.4%
11 Ullink HGT 7 TMT France 2014 10,034 19,166 3.0% 66.4%
12 Raet HGT 7 TMT Benelux 2016 16,127 17,034 2.7% 69.1%
13 The Foundry HGT 7 TMT UK 2015 15,175 14,640 2.3% 71.4%
14 Parts Alliance HGT 6 Services UK 2012 10,495 14,600 2.3% 73.7%
15 Frösunda HGT 6 Healthcare Nordic region 2010 14,296 11,429 1.8% 75.5%
16 Citation HGT 7 Services UK 2016 10,068 11,022 1.8% 77.3%
17 Lumesse HGT 6 TMT UK 2010 20,807 10,189 1.6% 78.9%
18 Kinapse HGT 7 Services UK 2016 9,959 9,986 1.6% 80.5%
19 Allocate Software Mercury TMT UK 2014 4,094 9,545 1.5% 82.0%
20 Intelliflo Mercury TMT
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