REG - HgCapital Trust PLC - Annual Financial Report
07/03/2022 07:00
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RNS Number : 7696D HgCapital Trust PLC 07 March 2022
HgCapital Trust plc
Legal Entity Identifier: 213800J7QUJJBEFSIN38
ANNUAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2021
A year of significant outperformance
delivered through a continued focus on software and service businesses
London, 7 March 2022: HgCapital Trust plc ('HGT'), today announces its
annual results for the year ended 31 December 2021.
HGT provides investors with a listed vehicle to invest in unquoted businesses
managed by Hg, Europe's largest investor in software & service 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 2021 include:
¡ Strong portfolio trading resulting in robust portfolio performance with a
total return NAV increase of 44% to a record high of £4.40 and net assets of
more than £2 billion
¡ Record level of investment, deploying £424 million alongside Hg, Europe's
largest investor in software & service businesses
¡ £271 million of returns realised on behalf of HGT and £141 million of new
equity raised
¡ Significant and consistent 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 £1,000 made 20 years ago in HGT would now be worth £24,134,
a total return of 2,313%. An equivalent investment in the FTSE All-Share Index
would be worth £3,3602.
Jim Strang, Chairman of HGT, commented:
"As I noted in my last review, HGT and its portfolio have coped well with the
challenges presented by the COVID-19 pandemic. The defensive nature of the
businesses within the portfolio and the operational skill of Hg have both
contributed to the success of HGT in weathering this challenging period. I am
happy to report that our full-year results continue to see the portfolio
delivering strong growth and excellent returns.
While 2021 has been very encouraging for HGT, we have all witnessed the recent
events unfolding in Eastern Europe. Your Board remains extremely focused on
ensuring that the risks inherent in managing a successful and fast-growing
investment company, during such uncertain times, are fully addressed. Despite
the challenges in the external environment and the volatility they may induce,
the Board is confident about the future prospects for HGT."
David Toms, Head of Research at Hg, commented:
"The overarching driver of Hg's performance - digital transformation of
business activity - continued apace in 2021 and the structural backdrop
remains robust. Coupled with the move to a Software-as-a-Service model, we
remain of the view that we are still early in a generational shift in market
opportunity."
SUMMARY performance
28 February % Total 31 December 31 December % Total
2022
return(2)
2021
2020
return(2)
NAV per share 436.7p -0.9% 440.5p 310.3p +43.9%
Share price 417.0p -0.8% 420.5p 305.0p +39.8%
FTSE All-Share Index -0.8% +18.3%
YTD 2022 2021
Movement
Movement
Net Asset Value £2.0bn -£17m £2.0bn £1.3bn +£714m
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.
Source: Hg, Factset
Note: Hg undertakes full revaluations of the portfolio on a quarterly basis,
the next process being 31 March 2022, therefore the movement in unrealised
value of the portfolio to the end of February 2022 is attributable to FX only.
Performance overview
Net assets of more than £2.0 billion, with continued outperformance of the
FTSE All-Share over one, three, five, ten and twenty-year periods:
- NAV per share of 440.5p, a total return of 44% to 31 December 2021.
- Share price total return of +40% over the year.
- Proposed final dividend of 5.0p per share (full year dividend of
7.0p per share).
Strong double-digit growth from the realised and unrealised portfolio:
- Revenue and EBITDA growth of 27% and 30% respectively across the top
20 investments (78% of the portfolio) over the last twelve months.
- £271 million of cash returned to HGT through realisations at
uplifts to book value and refinancings.
- Valuation multiple (EV/EBITDA) of 27.4x and net debt to EBITDA ratio
of 7.1x for the top 20 investments (78% of the portfolio).
Continued investment and commitments to drive future value:
- Continued investment with £424 million invested on behalf of HGT
into companies that Hg (the Manager) has known for many years and have
demonstrated a track record of strong performance across market cycles.
- New commitments were made to the Hg upper mid-market and HGT LP
funds, totalling $975 million / £720 million, with total outstanding
commitments at 31 December 2021 of £1.0 billion (December 2020: £647
million). These will be deployed over the next three to four years.
Credit facility and new equity issuance:
- In December, the Board of HGT agreed a further £50 million
multi-currency revolving credit facility bringing the total facility to £250
million.
- £141 million of new equity raised over 2021 via tap issuance.
POST PERIOD EVENTS AS AT 28 FEBRUARY 2022
§ NAV of 436.7p, YTD performance of -0.9% reflecting FX movements.
§ Current net assets of £2.0 billion.
§ Share price of 417.0p, YTD performance of -0.8%.
§ Estimated £19.3 million from the partial sale of Lyniate.
§ Estimated £65 million invested by HGT, primarily into Waystone, Lyniate ,
Pirum and Fonds Finanz.
§ Available liquid resources (including the credit facility) post-completion
of all announced transactions and the full year dividend payable in May 2022,
are £432 million (22% of 28 February pro-forma NAV).
§ Outstanding commitments of £906 million (46% of 28 February pro-forma
NAV). We expect these to be drawn down over the next three to four years.
Outlook
Commentary from Hg (the Manager):
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 is expected to continue to drive long-term performance
§ Against the backdrop of COVID-19, Hg's portfolio has performed well.
§ The overall portfolio valuations were up over 52% for the year to 31
December 2021, returning over £4 billion of liquidity to Hg investors,
including £271 million to HGT.
§ As highlighted previously, COVID-19 has had a limited direct impact on
the portfolio, given its defensive growth characteristics and we believe our
investments will continue to benefit from ongoing trends in the digitalisation
of business processes, across sectors and geographies.
§ The portfolio companies remain focused on selling business-critical and
non-discretionary software and services to their underlying business
customers, delivering highly predictable levels of recurring revenue.
§ Across our funds, we expect further investment activity in the next 12
months to continue - cautiously and with discipline - into businesses that we
have often tracked for several years.
§ Further liquidity events are expected over the next twelve months.
§ Bolt-ons and strategic M&A within the portfolio remain a key focus
and across the current portfolio.
- Ends -
The Company's 2021 Annual Report and an animated presentation from Hg to
accompany the results are available to view at:
http://www.hgcapitaltrust.com/ (http://www.hgcapitaltrust.com/) .
For further details:
HgCapital Trust plc
Laura Dixon (Senior Investor Relations Manager, Hg) +44 (0) 78 2459 2894
Brunswick
Samantha Chiene +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
(http://www.hgcapitaltrust.com) and www.hgcapital.com
(http://www.hgcapital.com)
HgCapital Trust plc
Annual report and accounts
31 December 2021
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.
HGT provides investors with unique exposure to a fast-growing portfolio of
unquoted investments, primarily in the software and business services
sectors, located throughout Europe and North America.
References in this annual report and accounts to HgCapital Trust plc have been
abbreviated to 'HgCapital Trust' or 'HGT'. Hg refers to the trading name of
Hg Pooled Management Limited and HgCapital LLP. Hg Pooled Management
Limited is the 'Manager'.
References in this annual report and accounts to 'total return' refer to a
return where it is assumed that an investor has reinvested all historic
dividends at the time when they were paid.
References in this annual report and accounts to pounds sterling have been
abbreviated to 'sterling'.
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.
Extracts from the Strategic Report
Financial and performance highlights
+43.9%(1)
NAV per share (440.5p)(2)
31 December 2020: +24.0%
£2.0bn
Net assets
31 December 2020: £1.29bn
+39.8%(1)
Share price (420.5p)
31 December 2020: +20.9%
£1.9bn
Market capitalisation
31 December 2020: £1.27bn
7.0p
Full-year dividend
31 December 2020: 5.0p
1.4%
Total ongoing charges
31 December 2020: 1.8%(3)
£424m
Cash invested on behalf of HGT
£271m
Cash returned to HGT
£470m
Available liquid resources
(23% of NAV)
31 December 2020: £388m
This includes a bank facility of £250m of which £99m was undrawn at
31 December.
£992m
Outstanding commitments
(49% of NAV)
31 December 2020: £647m
Commitments will be drawn down over the next three to four years (2022-26)
and are likely to be financed partly by cash from future realisations.
HGT can opt out of a new investment without penalty, should it not have the
cash available to invest.
Top 20 investments (78% of portfolio value)
+27%
Top 20 LTM sales growth
31 December 2020: +22%
+30%
Top 20 LTM EBITDA growth
31 December 2020: +31%
27.4x
Top 20 EV to EBITDA multiple
31 December 2020: 22.1x
7.1x
Top 20 net debt to EBITDA ratio
31 December 2020: 6.4x
(1) NAV per share and share price returns on a total return basis assuming all
historical dividends have been re-invested, which is an Alternative
Performance Measure ('APM').
(2) Please refer to note 10(b) on page 90 of the full Annual Report for
further detail on the calculation of NAV per share.
(3 )Please refer to page 114 of the full Annual Report for further detail on
the calculation of ongoing charges.
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.
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.
The Board reviews six separate Key Performance Indicators (KPIs) to assess the
success of HGT in meeting its stated objective.
The Board and Hg track progress against the identified KPIs in the manner
noted below.
__________________________________________________________________________________________________________
Financial performance
NAV per Share
The value of the portfolio and liquid resources post costs and dividends paid:
5-year annualised return
+25%(1)
5-year cumulative return
+200%(1)
Objective
Maintaining historic levels of growth in HGT's NAV.
Activities undertaken
The Board holds regular discussions both formally and between Board and AVRC
meetings in order to monitor the performance of the portfolio. These will
include:
• A rigorous review of valuations
• FX and hedging
• Fees
• Cash, commitments and credit availability
Total Shareholder Return
Share price total return assuming all historical dividends have been
re-invested:
5-year annualised return
+25%(1)
5-year cumulative return
+208%(1)
Objective
Continuing to deliver consistently strong returns to shareholders.
Activities undertaken
The Board regularly reviews the marketing and IR functions of HGT with the
Manager to continue to provide transparent and clear reporting. These include:
• Shareholder views
• Market performance
• Volumes and liquidity
• Share price discount to NAV
Portfolio Performance
Trading performance of the top 20 portfolio companies (78% of total
portfolio):
5-year average sales growth
+22%(1)
5-year average EBITDA growth
+28%(1)
Objective
Ensuring underlying portfolio companies continue to grow at attractive rates.
Activities undertaken
The Board regularly reviews the performance of the underlying portfolio
companies and meets with the deal executives to focus in detail on particular
businesses and 'clusters'. For further information please refer to pages 16 to
17 of the full Annual Report.
Balance sheet
Commitment Coverage Ratio:
Sum of available liquid resources (including credit facility) divided by total
commitments(2)
5-year average
0.58x(1)
Objective
Ensuring HGT's balance sheet is optimally structured to support investment
activity and future growth in NAV.
Activities undertaken
The Board holds regular meetings with Hg to review the cash, commitments and
availability of credit in order to optimise the balance sheet and ensure
sufficient capacity to underwrite future commitments. For further information
please refer to pages 16 to 17 of the full Annual Report.
Risk management and governance:
Key risks
Key risks are identified via the comprehensive risk management framework and
process adopted by HGT. Overall risk management is a continuous process where
principal and emerging risks are identified and suitable mitigating actions
agreed and tracked by the Board.
Current key risks identified by the process are 1) Impact of inflationary
pressure on cost and price levels across the portfolio, 2) Increasing threat
to portfolio companies and Hg from cyber attack and 3) Elevated geopolitical
risk and uncertainty. For more details see pages 16 and 17 of the full Annual
Report.
Objective
Ensuring a rigorous risk management process is in place and that key risks are
identified, monitored and suitable
mitigating actions are undertaken.
Activities undertaken
The HGT AVRC support the Board in the creation of a strong risk management
framework to provide a robust assessment of principal and emerging risks
facing HGT. For further information please refer to pages 16 to 17 of the full
Annual Report.
Governance
Ensuring strong governance and operating in a socially and environmentally
responsible manner
By implementing strong and transparent governance practices, the Board
ensures, not only the effective and proper administration of HGT, but also
that Hg, as manager, acts and behaves in a socially and environmentally
responsible manner across all its operations.
Objective
Ensuring HGT is managed to the highest standards of governance and that HGTs
affairs are conducted in a socially and environmentally responsible manner.
Activities undertaken
The Board recognises HGT's responsibility to its shareholders and the wider
society and endorses Hg's policy to invest in a socially responsible manner.
The Board meets regularly with the Head of ESG at Hg to monitor this. For
further information please refer to pages 17 to 18 of the full Annual Report.
(1)Alternative Performance Measure ('APM')
(2)HGT can opt out of a new investment without penalty, should it not have the
cash available to invest.
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.
Historical total return performance
Both HGT's share price and net asset value per share have continued to
outperform the FTSE All-Share Index.
1 3 5 10 20
year years years years years
% % p.a. % p.a. % p.a. % p.a.
NAV per share* 43.9 29.2 24.5 17.8 15.6
Share price 39.8 35.6 25.3 18.9 17.3
FTSE All-Share Index 18.3 8.3 5.4 7.7 6.2
NAV per share performance relative to the FTSE All-Share Index 25.6 20.9 19.1 10.1 9.4
Share price performance relative to the FTSE All-Share Index 21.5 27.3 19.9 11.2 11.1
*Please refer to note 10(b) on page 90 of the full Annual Report for further
detail on the calculation of NAV per share.
Based on HGT's share price at 31 December 2021 and allowing for all historic
dividends being reinvested, an investment of £1,000 made 20 years ago would
now be worth £24,134, a total return of 2,313%. An equivalent investment in
the FTSE All-Share Index would be worth £3,360.
Long-term net asset growth
2011 £7m £7m raised from subscription shares
2012 £36m £36m raised from subscription shares
2013 £18m £18m raised from subscription shares
2018 FTSE 250 Promotion to the FTSE 250
2019 10:1 10:1 share-split
2019 £75m £75m equity raised
2020 £25m £25m equity raised
2021 £141m £141m equity raised
Chairman's statement
"As I noted in my last review, HGT and its portfolio have coped well with the
challenges presented by the COVID-19 pandemic. The defensive nature of the
businesses within the portfolio and the operational skill of Hg have both
contributed to the success of HGT in weathering this challenging period. I am
happy to report that our full-year results continue to see the portfolio
delivering strong growth and excellent returns."
Jim Strang, Chairman, HgCapital Trust plc
Dear Shareholder,
As I noted in my last review, HGT and its portfolio have coped well with the
challenges presented by the COVID-19 pandemic. The defensive nature of the
businesses within the portfolio and the operational skill of Hg have both
contributed to the success of HGT in weathering this challenging period. I am
happy to report that our full-year results continue to see the portfolio
delivering strong growth and excellent returns.
The investment strategy that HGT follows is one of clear focus and discipline.
The clarity of this strategy and the effectiveness Hg demonstrates in its
execution has allowed the investment machinery of HGT to continue to function
very effectively over the course of the last year. Several new companies were
added to the portfolio, either as primary platform investments or as value
accreting acquisitions for existing investments. As regards exit and
realisation activity, again the year has been a productive one with numerous
exits not only delivering material gains to HGT, but also validating the
valuations placed on these assets. Exits over the last 12 months have been at
an average of 34% over carrying NAV.
The strong results produced this year support HGT engaging in a new cycle of
investment with Hg, which is now one of the largest European private equity
managers. The Board believe that Hg continues to innovate and improve its own
processes and investment strategy, ensuring its operations are at the
forefront of best practice in the private equity industry, including areas
such as ESG, Diversity and Inclusion.
Consequently, the Board has articulated its desires to make a series of
further commitments to new Hg funds as they are raised. The first such
commitment of $850 million (£628 million) was recently made to Hg's latest
upper mid-market fund. A number of further commitments are anticipated to
follow in the coming year as your Board looks to invest across the Hg fund
family in order to continue the successful development of HGT and to support
future growth. Through this programme, HGT will continue to be Hg's largest
client and the most substantial investor in its funds.
Highlights in 2021 included:
• 44% NAV per share growth on a total return basis, with net assets
attaining a record level of £2.0 billion;
• 40% share price growth on a total return basis, resulting in a market
capitalisation of £1.9 billion;
• £424 million of new and further investments by HGT, primarily into 16
new businesses across the core investment clusters targeted by Hg;
• £271 million of proceeds returned to HGT, primarily from seven full
realisations;
• More than £141 million of new equity issued.
• $975 million committed to invest alongside Hg funds over the next
3-4 years
Performance
HGT performed extremely well during 2021. The NAV per share has increased from
£3.10 to £4.40, an increase of 44% on a total return basis. Strong earnings
growth from the underlying portfolio companies drove this performance, as well
as market support and valuation multiple increases for software investments,
notably the kind of profitable, cash-flow generative businesses in which HGT
is invested. Portfolio performance over the year was impressive, with the top
20 underlying companies (78% of the portfolio) generating year-on-year growth
of 27% (2020: 22%) in revenue terms and 30% (2020: 31%) in EBITDA. These
businesses have continued to trade successfully, despite the ongoing
disruptions affecting major economies and, with their significant and
predictable forward cash flows, are appropriately financed with an average net
debt-to-EBITDA ratio of 7.1x. Currently, 100% of the portfolio by value is
held above its original cost of acquisition. The total net assets of HGT at
31 December reached £2.0 billion, an increase of £714 million over the
reported figures at 31 December 2020. These figures also reflect the dividend
payments of £21.7 million in May and October 2021, as well as the proceeds
from the tap issuance of shares over the year of more than £140 million.
Over 2021, HGT has seen share price performance (on a total return basis) of
39.8%, outperforming the FTSE All‑Share Index by more than 21 percentage
points. The analysis of NAV movements and attribution analysis (on pages 38-39
of the full Annual Report) set out a breakdown of movements in the NAV and the
underlying investment portfolio.
"While 2021 has been very encouraging for HGT, we have all witnessed the
recent events unfolding in Eastern Europe. Your Board remains extremely
focused on ensuring that the risks inherent in managing a successful and
fast-growing investment company, during such uncertain times, are fully
addressed. The Board and its sub-committees, notably the Audit, Valuations and
Risk Committee, continues to develop the process and approaches used across
HGT to mitigate risk and strives to ensure that governance remains at the
highest possible level. Despite the challenges in the external environment and
the volatility they may induce, the Board is confident about the future
prospects for HGT"
Investments and realisations
Over 2021, HGT invested £424 million, primarily in 16 new investments,
including insightsoftware, Howden, Benevity, Litera, Trackunit, HHAeXchange,
Serrala and MMIT Evaluate. Since the year-end, a further £49 million has
been invested primarily into 3 new investments, including Fonds Finanz, Pirum
and Waystone. These investments all fall within Hg's eight focus 'clusters',
solving workflow problems and serving the needs of similar business customer
sets in comparable end markets. Hg targets businesses with compelling market
positions within these clusters, and while such assets often command a full
price on acquisition, the experience and capability which Hg brings help to
drive these companies to realise their full potential.
It is also worth noting that HGT currently holds around 6% of NAV in
co-investments; these are investments made alongside Hg funds which are free
from any fees or carried interest payable to the Manager. HGT will continue to
take up co-investment opportunities as they arise and will seek to maintain 10
to 15% of NAV in this strategy across different fund deployment cycles.
Co-investments provide a useful mechanism to optimise the use of HGT's balance
sheet capital and help reduce overall costs.
In 2021, Hg returned £271 million to HGT, primarily through the exits of
Allocate, Mitratech, BrightPay, Achilles and APG. In aggregate, these
realisations were at an average uplift to their December valuations of 34%,
with an average multiple of cost achieved of 2.4x, reinforcing the value that
buyers place on the quality of the assets within the portfolio. For further
information about investments and realisations, please refer to pages 44-51 of
the full Annual Report.
New commitments
Long-term shareholders will be familiar with the
commitment-investment-realisation cycle which underpins the HGT investment
model. Every two to four years, HGT and Hg's other institutional investors
make commitments to invest in funds which seek to make investments over the
following three to four years. HGT thereby enables shareholders to invest
alongside the world's largest institutional investors in businesses which
would otherwise be potentially inaccessible to public market investors.
In 2021, HGT committed $850 million (£628 million) to the Hg's latest upper
mid-market fund, and expects to make further commitments across Hg's fund
family, ensuring that HGT can continue to participate in the investments made
by Hg. Further detail on all commitments to Hg funds can be found on page 42
of the Manager's Review in the full Annual Report.
The Board has additionally chosen to commit $125 million (£92.3 million) to
a programme of junior debt investments organised by Hg, via HGT LP. This
capital will be used to invest into the junior debt financings across the Hg
portfolio over the next two to three years, alongside a group of Hg's
institutional investors. These investments have an attractive risk and return
profile and are a further effective means to manage liquidity on HGT's balance
sheet.
Across all funds, HGT will continue to have the benefit of an 'opt‑out' from
the commitment to invest in any individual new transaction, if HGT does not
have sufficient funds available; this feature, which we understand is unique
to HGT, is of considerable benefit to managing HGT's balance sheet
efficiently.
Balance sheet
Following the new commitment programme established in 2020, the Board agreed
on a revised multi-currency revolving credit facility of £200 million. In
2021 this facility was increased to £250 million in order to optimise
balance sheet management and to help manage foreign exchange risk. A total of
£99 million remained undrawn from this facility at 31 December 2021.
Including cash on the balance sheet, and the undrawn facility above, HGT had
available liquid resources of £470 million at the end of the year.
As shares in HGT have traded at a premium to NAV over much of the year, HGT
has taken the opportunity to increase balance sheet liquidity through a series
of equity tap issuances, raising more than £140 million. When possible, the
Board will continue to consider new equity issuance, providing that market
conditions permit, offering existing and new investors the opportunity to
subscribe to and increase HGT's equity base, while always bearing in mind our
current shareholders' interests. The Board regularly reviews the balance
sheet, commitment profile and available liquid resources at hand to optimise
this mix for the benefit of HGT.
Impact and responsible investment
Your Board and the Manager 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. Hg is, itself, independently certified as a
carbon‑neutral company with a UNPRI assessment of Hg's approach to
responsible investment of AA++ (the highest available rating). The Board of
HGT meets regularly with the Hg Responsible Investment team to ensure that
Hg's work is fully understood and endorsed by the Board.
As we reported in the 2020 full year accounts, Hg launched The Hg Foundation
in 2020 - a charitable initiative to provide funding and operational support
to schemes across Europe, the UK and the US. The Hg Foundation's goal is to
have an impact on the development of those skills 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. For further information about this
and the responsible investment focus at Hg, please see pages 34-37 of the
Manager's Review in the full Annual Report.
Dividend
As noted previously, HGT aims to achieve growth in the net asset value per
share and in the share price, rather than to achieve a specific level of
dividend. Furthermore, the ability of HGT to pay dividends is very much
influenced by the capital structures of the transactions entered into by Hg
and by income received on any liquid resources held subject to investment.
Nevertheless, HGT will continue to provide guidance as to the broad dividend
objectives and, currently, the Board expects to be able to deliver modest
dividend progression.
As regards the current financial year, and subject to shareholder approval,
HGT will deliver a final dividend of 5.0p per share, payable in May,
following the interim dividend of 2.0 pence in October, bringing the full year
dividend to 7.0p per share (2020: 5.0 pence per share). The Board keeps the
dividend objective of HGT under frequent review and will communicate, to
shareholders, further guidance on the dividend when it is practicable to do
so.
Board and corporate governance
As previously communicated, and in line with the Board's succession plan,
Peter Dunscombe will be retiring from the Board at the AGM in 2022.
Consequently, the Board has undertaken an externally supported search process
over the last six months to find a new Non-Executive Director. This process,
which is now at an advanced stage, has been informed by the results of the
regular Board effectiveness review, ensuring that new joiners to the Board
bring with them the most relevant skills and experience for, not only today,
but for the future development of HGT. In closing, I would like to extend my
sincere thanks on behalf of all my Board colleagues to Peter for his many
years of service and for his significant contribution to the success of HGT.
Prospects
The last year proved to be a highly successful one for HGT, with strong growth
both in assets and in share value, as HGT successfully navigated the risks and
opportunities that prevailed. Turning to the future, it is clear that the risk
environment will present new challenges. Not only will HGT have to deal with
the impact of a rising interest rate environment for the first time in several
years but also with the sharp increase in inflation witnessed around the
world. Significantly, the increase in geo-political risk seems set to
persist for some time and while the direct impact on HGT and its underlying
investments are not currently anticipated to be material, the collateral risks
and in particular the threat posed by cyber-attacks are of very real relevance
for the HGT portfolio and the many cloud software businesses within it.
Despite these obvious challenges and the volatility they may induce, the Board
remains optimistic about the future prospects for HGT. The assets within the
portfolio provide critical solutions to their clients and reduce the costs and
complexity of doing business. Notwithstanding the high multiples that these
assets currently attract, the long-term value creation prospects from owning
such a portfolio remains very attractive and the machinery Hg operates to
continue to refresh this portfolio while optimising returns, continues to
improve. The Board continues to work collaboratively with Hg to optimise the
investment opportunity for HGT and shareholders, while at all times ensuring
the many risks that prevail are as comprehensively and effectively managed as
is
possible.
Jim Strang
Chairman
4 March 2022
"In partnership with our Hg colleagues, whose guidance and expertise has been
invaluable, we have driven successful transformation at IRIS in the past two
years. The Hg portfolio team helped us roll out our Quantum Programme, which
has brought disparate divisions onto a single best practice set of processes
and systems, enabling us to vastly improve general efficiency and
effectiveness - with the benefit of also materially improving our commercial
ability to cross-sell and up-sell. Thank you for helping us maximise the
potential of our IRIS success."
Elona Mortimer-Zhika, CEO, IRIS
Investment objective and investment policy
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.
During the year, the Board reviewed the Investment Policy and is submitting an
amended Investment Policy for approval by shareholders at the 2022 AGM. The
Board would like to recommend that:
a. on investment, no initial (rather than total) investment in a single
business will exceed a maximum of 20% of gross assets. This change is proposed
to allow additional flexibility in the size of investments that can be made;
b. the policy of HGT is to invest predominantly, directly or indirectly, in
a portfolio of unlisted software and tech-enabled services companies and HGT
holds a spread of businesses diversified by the end-markets the investee
companies serve and by geographies in which they operate;
c. the Manager invests mainly in companies that have substantial business
operations and opportunities in Europe, though the investee companies
themselves may serve, or be present in, a variety of sectors;
d. part of HGT's portfolio is located outside of the UK, predominantly in
northern Europe, and now, increasingly, in North America.
A blackline version of the investment policy, showing the proposed changes is
set out at the end of the Notice of AGM on page 149 of the full Annual
Report.
Investment policy
The policy of HGT is to invest, directly or indirectly, in a portfolio of
unlisted companies where Hg believes that it can add value through increasing
organic growth, generating operational improvements, driving margin expansion,
reorganisation or acquisition - to achieve scale. HGT seeks to maximise its
opportunities and reduce investment risk by holding a spread of businesses
diversified by end-market and geography.
Risk management
HGT has adopted formal policies to control risk arising through excessive
leverage or concentration. On investment, no investment in a single business
will exceed a maximum of 20% of gross assets. HGT may invest in other listed
closed-ended investment funds, up to a maximum at the time of investment of
15% of gross assets. HGT's maximum exposure to unlisted investments is 100% of
the gross assets of HGT from time to time.
Sectors and markets
As HGT's policy is to invest in businesses in which Hg can play an active role
in supporting management, Hg invests primarily in companies whose operations
are headquartered or substantially based in Europe. These companies operate in
a range of countries, but there is no policy of making allocations to specific
countries or markets. Investments are made across a range of sectors where Hg
believes that its skills can add value, but there is no policy of making
allocations to sectors.
HGT may, from time to time, invest directly in private equity funds managed by
Hg where it is more economical and practical to do so.
Leverage
Each underlying investment is usually leveraged, but no more than its own cash
flow can support, in order to enhance value creation; it is impractical to set
a maximum for such gearing across the portfolio as a whole. HGT commits to
invest in new opportunities in order to maintain the proportion of gross
assets which are invested at any time, but monitors such commitments carefully
against projected cash flows.
HGT has the power to borrow and to charge its assets as security. The articles
restrict HGT's ability (without shareholders' approval) to borrow to no more
than twice HGT's share capital and reserves, allowing for the deduction of
debit balances on any reserves.
Hedging
Part of HGT's portfolio is located outside of the UK, predominantly in
northern Europe, with a further part in businesses which operate in US
dollars. HGT may therefore hold investments valued in currencies other than
sterling. From time to time, HGT may put in place hedging arrangements with
the objective of protecting the sterling translation of a valuation in another
currency. Derivatives are also used to protect the sterling value of the cost
of investment made or proceeds from realising investments in other currencies,
between the exchange of contracts and the completion of a transaction.
Commitment strategy
HGT employs a commitment strategy to ensure that its balance sheet is managed
efficiently. The level of commitment is regularly reviewed by the Board and
Hg.
Liquid funds
HGT maintains a level of liquidity to ensure, as far as can be forecast, that
it can participate in all investments made by Hg throughout the
investment-realisation cycle. At certain points in that cycle, HGT may hold
substantial amounts of cash awaiting investment. HGT may invest its liquid
funds in government or corporate debt securities, or in bank deposits, in each
case with an investment grade rating, or in managed liquidity funds which hold
investments of a similar quality.
If there is surplus capital and conditions for new investment appear to be
unfavourable, the Board will consider returning capital to shareholders,
probably through the market purchase of shares.
Any material change to HGT's investment objective and policy will be made only
with the approval of shareholders in a general meeting.
Business model and risk framework
The Board has a clear view of the rationale for investing in unquoted
businesses where the private equity ownership model has the potential to
accelerate the growth in value creation. HGT seeks to capture this upside,
whilst operating within a rigorous risk-management framework.
The Board believes that there is a convincing rationale for directly investing
in well-researched private businesses where there is potential for substantial
growth in value, notably where there is the ability to work with management to
implement strategic or operational improvements.
HGT offers a simple and liquid means by which shareholders can invest in
unquoted growth companies, while benefiting from an investment company's
governance model.
Business model
To achieve HGT's investment objective and within the limits set by the
investment policy, HGT is an investor in unquoted businesses managed, and in
most cases controlled, by the Manager. From time to time, HGT may hold listed
securities in pursuit of its investment policy.
HGT is currently invested in more than 40 companies (as set out on page 27 of
the full Annual Report), ranging in size, sector and geography, providing
diversification.
The Board has delegated the management of HGT's investments to Hg Pooled
Management Limited (the 'Manager' or 'Hg'). Further details of the terms of
the management agreement are set out on page 114 of the full Annual Report.
The Manager invests predominantly in unquoted software and business service
companies in expanding sectors and provides portfolio management support. Hg's
review on pages 23-54 of the full Annual Report outlines how HGT's investments
are managed on behalf of HGT.
Most of HGT's investments are held through special-purpose partnerships, of
which it is the sole limited partner.
Periodically, HGT enters into a formal commitment to invest in businesses
identified by the Manager, alongside institutional investors which invest in
an Hg Limited Partnership Fund. Such commitments are normally drawn down over
three to four years. The institutional investors and HGT invest on similar
terms.
HGT is usually the largest investor in each business. The Board has a further
objective of keeping HGT as fully invested as is practicable, while ensuring
that it will have the necessary cash available when a new investment arises.
The Board, on the advice of the Manager, makes assumptions about the rate of
deployment of funds into new investments and the timing and value of
realisations. However, to mitigate the risk of being unable to fund any
draw-down under its commitments to invest, the Board has negotiated a right to
opt out, without penalty, of its obligation to fund such draw-downs, should
the need arise.
HGT may also take up a co-investment in some businesses (in addition to the
investment which it has committed to make).
Typically, HGT has no liability to pay fees on such co-investment and no
carried interest incentive is payable to the Manager on realisation (currently
6% of HGT's NAV is in co-investments). HGT may also offer to acquire a limited
partnership interest in any of Hg's funds, in the event that an institutional
investor wishes to realise its partnership interest.
The Board regularly monitors progress across all of the businesses in which it
is invested as well as their valuation, the development of the Manager's
investment strategy and the resources and sustainability of the business
model.
Investment trust status
As HGT is constituted as an investment trust and its shares are listed on the
London Stock Exchange, it can take advantage of tax benefits available to
investment trusts. This allows HGT to realise investments from its portfolio
without liability to corporation tax. The Board intends to retain this status
provided that it is in shareholders' interest to do so. This will require the
Board to declare dividends so that not more than 15% of taxable income is
retained each year.
Performance targets
HGT's aim is to achieve returns in excess of the FTSE All-Share Index over the
long term. To this end, the Board monitors the performance indicators, as set
out on pages 6 and 7 of the full Annual Report. In the year to 31 December
2021, HGT's NAV per share increased by 43.9% on a total return basis. The FTSE
All-Share Index increased by 18.3% on a total return basis over the year. The
year to date total return of HGT's share price was 39.8%. NAV per share has
grown by 17.8% p.a. compound over the last 10 years and 15.6% p.a. compound
over the last 20 years. The share price has seen broadly similar performance
growing by 18.9% p.a. compound over the last 10 years and 17.3% p.a. compound
over the last 20 years.
All of the above returns assume the reinvestment of all historical dividends.
The Board and the Manager aim to continue to achieve consistent, long-term
returns in this range.
HGT is not managed so as to achieve any short-term performance relative to any
index. The Board also compares HGT's NAV and share price performance versus
other comparable indices with similar characteristics.
Dividend
The Board reviews HGT's approach to dividends on a regular basis, taking into
consideration feedback from shareholders and the evolving nature of HGT's
income streams, which are driven by the investment structures Hg utilises in
its various transactions. The Board regards the full year dividend declared in
respect of 2020 (5.0 pence) as a sustainable level, absent some material shift
in underlying deal structures. From time to time, the pattern of deployment
and the income which may arise may allow for a higher level of dividend to be
supported. The current year is an example of such a year allowing a further
distribution of residual income and a higher full year dividend of 7.0 pence.
It is important to note that HGT, in order to qualify for investment trust tax
status, can only retain a maximum of 15% of the income.
Going concern
HGT's business activities, together with those factors likely to affect its
future development, performance and financial position are described in the
Board's Strategic Report and Hg's Review. The financial position of HGT, its
cash flows, liquidity and borrowing facilities are described in the Strategic
Report. The Directors have considered the FRC Guidance on Risk Management,
Internal Control and Related Financial and Business Reporting and believe that
HGT is well placed to manage its business risks successfully. The Directors
review cash flow projections regularly, including important assumptions about
future realisations and the rate at which funds will be deployed into new
investments. The Directors have a reasonable expectation that HGT will have
adequate resources to continue in operational existence for at least the next
12‑month period from the date of approval of this Report and to be able to
meet its outstanding commitments. Accordingly, they continue to adopt the
going concern basis in preparing these results.
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.
Longer-term viability statement
In accordance with provision 36 of the AIC Code of Corporate Governance, the
Directors have also assessed the prospects of HGT over a period longer than
the 12 months required by the 'Going Concern' provision. The Board believes
that the appropriate period over which to assess HGT's viability may vary from
year to year depending on several factors: the outstanding investment
commitments in particular. Therefore, the Directors evaluate and decide it on
an annual basis.
The objective of HGT is to provide shareholders with consistent, long‑term
and sustainable returns, and the Board believes that it should assess the
viability of HGT over a minimum of five years. This year, the Directors have
elected to assess HGT's viability over the five‑year period ending December
2026, because the current commitments, at year end, run until 2026.
The key assumption underpinning the strategic planning is that HGT's business
model remains broadly unchanged and HGT continues to invest in unquoted
businesses acquired by Hg.
Assessment of prospects
The Board has assessed HGT's prospects and longer‑term viability, taking
into account:
• HGT's position with reference to the business model (a description of
which can be found on pages 14 and 15 of the full Annual Report);
• the balance sheet, cash flow projections (including the key assumptions on
which these are modelled), and availability of funding. During the year, the
bank facility was increased from £200 million to £250 million and as at
year end, including cash on the balance sheet and the undrawn facility, HGT
had available liquid resources of £470 million, 23% of the NAV. More details
are on page 80 of the full Annual Report.
• HGT's contractual commitments (detailed on page 101 of the full Annual
Report).
• the principal risks and uncertainties, including: performance; regulatory;
operational; financial; liquidity; and borrowing, detailed on pages 16 of the
Strategic Report in the full Annual Report. Assessment of risks is described
below.
Assessment of risks
As part of the Risk Management Framework (described on pages 14 and 15 in the
full Annual Report), Principal and emerging risks and uncertainties are
routinely subject to a comprehensive review by the Audit, Risk and Valuations
Committee and the Board. Managing risk is fundamental to the delivery of HGT's
strategy, and this is achieved by defining HGT's risk appetite and managing
risks within that appetite, particularly those which would threaten its
business model, future performance, solvency, valuation, liquidity or
reputation. Of the identified risks, the following are the most important to
the assessment of the viability: availability of capital; under-performance of
underlying portfolio companies; political and macro-economic uncertainty and
its impact on the markets; and associated risks to the valuations.
More details on financial risk are included on pages 95 to 99 in Note 19 to
the financial statements in the full Annual Report. Principal and emerging
risks and uncertainties, their potential impact on HGT, and the mitigating
actions are set out in full on pages 16 and 17 of the Strategic Report in the
full Annual Report.
Sensitivity analysis
The Directors of HGT regularly stress test the portfolio and its cash flows
and review and challenge the sensitivity of the business model against the
principal risks which are that are likely to have an adverse impact,
including:
• Insufficient funds to meet commitments. A base case and downside scenarios
for cash flow projections, which take into account pipeline activity,
commitments, and the potential timings of new acquisitions and exits, and
which model HGT's liquid resources and available borrowing are reviewed
regularly. Details of HGT's financial position, including the amount of
available borrowing, are on page 5 of the full Annual Report; and
• A significant economic downturn, including sensitivity to equity price
risk. The impact of 1x reduction in EV to EBITDA multiple applied to unquoted
investments, as well as mitigating actions, are set out on page 97 in
Note 19 to the financial statements in the full Annual Report.
Assessment of viability
Based on the Board's assessment, the Directors have a reasonable expectation
that HGT will be able to continue to operate and meet its liabilities, as they
fall due, over a five-year period ending December 2026.
Principal and emerging risks and uncertainties
The Board uses a comprehensive Risk Management Framework as a means to assess
the principal and emerging risks facing HGT. Managing risk is fundamental to
the sustainable long term delivery of HGT's strategy and this Risk Management
Framework provides the objective context for the decisions taken by the Board,
particularly as they relate to performance, liquidity, valuation and business
model.
The Risk Management Framework is dynamic and is used by the Audit, Valuations
and Risk Committee to assess the probability and likely impact of principal
risks, to ensure that HGT is operating within a defined risk appetite for each
category of risk, and that focus is maintained upon those risks which require
attention, prioritising mitigating action from both HGT and the Manager. This
risk register is regularly stress tested, to provide assurance that the
performance of HGT is insulated, as far as practical, from exogenous factors
in the operating environment.
During 2021, the relevance and efficacy of the Risk Management Framework was
thoroughly tested by the conditions of the global pandemic, where changes in
the operating environment were more rapid and more pronounced than had been
experienced previously. During the year, the mitigations in place ensured that
principal risks remained substantially within appetite, and the resilience
both of the portfolio investments and their valuations was demonstrated.
Looking forward, the Board and AVRC recognise the probability of increasing
interest rates, cost inflation and a tightening fiscal environment. Similarly,
there is the prospect of increased operating risk from cyber-crime, wage
pressure and a reducing supply of talent. Whilst the revenues and operations
of Hg's portfolio companies are not reliant on the economies of Russia or
Ukraine, the heightened geopolitical uncertainty in the countries of Eastern
Europe is an emerging risk that could lead to broader economic impacts. The
Board and AVRC ensure that the Risk Management Framework is reviewed regularly
and the mitigating actions in place are appropriate to ensure keep principal
risks within appetite.
HGT considers the principal risks to be in four main categories:
Investment Risk: the risk to HGT that inappropriate investment or realisation
decisions reduce the returns made.
Financial Risk: the risk that HGT's valuation, liquidity or resources are
insufficient to allow HGT to invest sufficiently.
Operational Risk: the risk of changing regulation, the risk of failure of Hg's
processes and systems of internal control, and the underlying performance of
the portfolio.
External Risk: the risk of adverse macro-economic, regulatory or geo-political
change.
Potential risk Potential impact Mitigation
Trend/Appetite
Investment
Performance • Reduction in NAV • Deployment of capital is a rigorous process determined by the Hg
Investment Committee, operated by experienced investment professionals.
Risk that underlying portfolio companies underperform. • Reduction in share price
• Portfolio performance is reviewed regularly by Hg's Realisation Committee
• Reputational damage comprising experienced investment professionals and the HGT AVRC.
• An operational performance group interacts across the portfolio to drive
performance.
Financial
Valuations • False market in HGT shares • Valuations are prepared in accordance with IPEV guidelines and tested
against HGT's Valuation Policy.
Risk that inaccurate valuations would lead to a misleading NAV. • Reputational damage
• The Manager's Valuation Committee, independently chaired, reviews and
• Reduction in share price approves valuations quarterly.
• Constrained access to capital • The auditors of both Hg funds and HGT review the valuation and methodology
as part of their audit procedures.
• The AVRC reviews and cross-checks valuations against a broad range of
objective valuation methodologies.
Liquidity • Reputational damage • Borrowing structures and cash flow forecasts are considered at each HGT
Board meeting.
Risk that insufficient liquid resources are available to make investments. • Reduced NAV growth
• An additional £250 million of liquidity is available through a bank
• Reduced shareholder return facility, which was 60% drawn at the year end.
• An opt-out facility is available across all investing funds.
Commitment • Reduced shareholder return • A bank facility is in place to facilitate orderly management of the
balance sheet.
Risk that capacity is insufficient to underwrite future commitments to Hg • Reduction in share-price
funds.
• There is an opt-out facility across all investing funds.
• A five year cash and commitment forecast is independently reviewed by the
AVRC.
Operational
Regulation • Increased corporation tax, leading to higher fees and potential impact on • The Manager monitors investment movements, forecast income and expenditure
valuation and retained income (if any) to ensure compliance with sections 1158 and 1159
Risk that regulation changes affect investment trust status.
of the CTA.
• Reduction in share price
• Continuing investment trust status is certified by the Manager
at each meeting of the Board.
Regulation • Misunderstood or misreported regulation leading to reduced demand for • Regular compliance and risk reviews are reported to the Board by the
shares Manager's compliance team.
Risk that other changes in legislation, regulation or government policy could
influence the decisions of investors. • Lack of adherence to regulation leading to reputational risk • Strong shareholder engagement through:
- dedicated investor relations team
- corporate broker.
- company secretary.
Manager internal controls and processes • Reputational damage • The Manager is regulated and supervised by the FCA.
Risk that control weaknesses of the Manager lead to poor performance or • Reduced shareholder returns • The Manager has controls in place, including those related to investment
non-compliance with regulations. decisions; portfolio reviews; recruitment, training and promotions; financial
performance and payments; protection of client assets; compliance; regulation.
• The Board of HGT and its auditors regularly review these processes and
controls.
Cyber security • Loss of or lack of control over data due to cyber attacks • A portfolio cyber security team monitors cyber security across Hg and the
portfolio companies and drives improvements.
Risk of cyber attack and data loss at Hg and portfolio companies. • Reputational damage
• The GDPR Committee has successfully implemented mandatory training for all
• Regulatory sanction staff.
External
Political and macro-economic uncertainty • reduction in valuation of portfolio investments • Hg's portfolio is diversified with a high degree of recurring revenue.
Risk arising from geopolitical instability and conflict. • disruption to capital markets • The Manager remains focused on the various issues which may need to be
addressed, including:
- reduced availability of credit to fund future investments
- regulation, marketing, trade and foreign exchange movements
• These are regularly monitored by the Board of HGT, considering a range of
downturn scenarios in our business planning.
Foreign exchange • Reduction in shareholder returns • The Board of HGT regularly monitors currency fluctuations.
Risk of foreign exchange movements affecting investments made in currencies • The Hg treasury functions hedge currency exposure and actively mitigate
other than Sterling. currency risk where appropriate.
Global pandemic • Portfolio companies suffer revenue declines • Portfolio resilience is stress-tested against pandemic impacts.
Risk of performance and investment disruption from current and future pandemic • Earnings multiples of listed companies applied to valuations might be • The majority of revenues are derived from subscription-based recurring
events. adversely affected revenues for non-discretionary technology-led services.
• Operational performance, valuations and investment deal flow have shown
resilience to pandemic disruptions.
Environmental, social and governance matters
Socially responsible investment
The Board has endorsed Hg's policy to invest in a socially responsible manner
and Hg's approach to responsible investing, including Hg's sustainable
business framework and how ESG is embedded in the deal process, is described
in detail on pages 34-35 of the full Annual Report) and at
www.hgcapital.com/responsibility. Hg's focus is on identifying high-quality
and sustainable businesses and supporting their growth for the benefit of
shareholders and the wider society. The Board monitors investment activity to
ensure that it is compatible with these policies.
HGT has no employees and has limited direct impact on the environment. HGT
aims to conduct itself responsibly, ethically and fairly and has sought to
ensure that Hg's management of investments takes account of social,
environmental and ethical factors where appropriate. The sectors in which the
Manager invests do not generally raise material ethical issues.
Employees, human rights and community issues
The Board recognises the requirement under section 414C of the Companies Act
2006 to provide information about employees, human rights and community
issues, including information in respect of any of its policies in relation to
these matters and their effectiveness. These requirements do not apply to HGT
as it has no employees, all of the Directors are non-executive and it has
outsourced all of its functions to third-party providers. HGT has not,
therefore, reported further in respect of these provisions.
Modern slavery
HGT has no employees of its own. The Directors are satisfied that, to the best
of their knowledge, Hg complies with the provisions of the UK Modern Slavery
Act 2015. For further information:
https://hgcapital.com/wp-content/uploads/2021/09/Hg-Modern-Slavery-Act-Statement-Sep-2021.pdf
Diversity
All financial decisions are made under conditions of uncertainty. The Board
recognises the value of both identity and cognitive diversity in ensuring that
varied perspectives are considered when making decisions.
The Board places value on attracting Directors with diverse outlooks and
experience. The skills and experience which the current members of the Board
bring to HGT's leadership are described on pages 112 and 113 of the full
Annual Report and the details of the Board's Diversity and Inclusion policy
are set out on page 33 of the full Annual Report. At the end of the year under
review, the Board of Directors of HGT comprised four men and two women.
The Manager has an equal opportunities policy and currently employs 147 men
and 135 women. Nic Humphries, Senior Partner, Hg, is a member of the Level 20
Advisory Council, a not-for-profit organisation which aims to inspire more
women to join and succeed in the European private equity industry. Details of
Hg's diversity and inclusion initiatives can be found on page 33 of the full
Annual Report.
Climate change
Hg is a carbon neutral company and the details of Hg's efforts to offset
carbon emissions, including Hg's carbon footprint for the financial year
2020/21 are described on pages 35 of the full Annual Report. Understanding and
managing climate-related risks and opportunities based on the Taskforce on
Climate-related Financial Disclosure´s ('TCFD') recommendations is a
fundamental part of Hg's Sustainability Policy. TCFD provides a guiding
framework for the Manager's investment and ownership strategy. Hg's inaugural
TCFD report can be found on Hg's website
https://hgcapital.com/wp-content/uploads/2021/11/Taskforce-on-Climate-related-Financial-Disclosures-Report-2021-Final.pdf
Directors' Duties
Section 172 of the Companies Act 2006
Fulfilling the duty under section 172 of the Companies Act 2006 ('the Act')
naturally supports HGT in achieving its investment objective and helps to
ensure that all decisions are made in a responsible and sustainable way.
To ensure that the Directors are aware of, and understand, their duties, they
are provided (when they first join the Board) with a tailored induction,
including details of all relevant regulatory and legal duties as a Director of
a UK public limited company. They continue to receive regular and ongoing
updates and training on relevant legislative and regulatory developments. They
also have continued access to the advice and services of the Company Secretary
and can seek independent professional advice, when required. The schedule of
Matters Reserved for the Board, as well as the terms of reference of its
committees is reviewed annually and further describe Directors'
responsibilities and obligations, including any statutory and regulatory
duties.
Purpose
The purpose of HGT is to deliver to shareholders 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.
HGT provides shareholders with exposure to a fast-growing network of unquoted
investments, primarily in European software and business service companies. In
providing access to investments not otherwise usually available to its
shareholders, HGT's values focus on transparency and clarity in its reporting,
constructive challenge in maintaining a strong relationship with the Manager
and mitigating avoidable risk. The Board's strategy is to work closely with
its selected Manager in a long-term relationship designed to support and
encourage the Manager to build and maintain the skills and resources to
deliver long-term, consistent returns through a concentrated portfolio of
carefully selected businesses.
Decision-making
The importance of stakeholder considerations, in particular in the context of
decision-making, is regularly brought to the Board's attention by the Company
Secretary and taken into account at every Board meeting, with a paper
reminding Directors of the relevant matters at the start of every Board
meeting. For example, the strategic planning discussions involve careful
considerations of the longer-term consequences of any decisions and their
implications on shareholders and other stakeholders and are supported by
detailed cash flow projections based on various scenarios, including:
assumptions around HGT's contractual commitments; availability of funding;
borrowing; foreign currency management; wider economic conditions; market
performance.
Culture
In 2020, the Directors considered and defined HGT's culture, purpose and
values and, during 2021, through assessing the culture policy and reconfirming
that this remained valid and discussing both the culture of the Company and
its Manager at the Strategy Day. By formally identifying the important
elements of HGT's culture, the Directors can assess and monitor the culture
and ensure that it remains well aligned with HGT's purpose, values and
strategy in the pursuance of the long-term sustainable success of HGT.
The culture of an externally managed investment trust is the product of the
Board's diversity and behaviours, the values and behaviours of the Manager and
the way in which the Board and the Manager interact with each other and with
HGT's stakeholders.
The Directors have worked to incorporate these behaviours and processes into
the annual review of the Manager, strategic planning, the annual evaluation of
Board effectiveness and reporting to stakeholders - thus embedding
consideration of stakeholders' interests, long-term perspective, maintaining
reputation for fairness and high standards of governance, corporate reporting
and business conduct more generally in HGT's culture and processes.
The Directors recognise the value in sustaining a culture which contributes to
achieving the purpose of HGT in a way which is consistent with its values and
strategy. Elements of culture include:
• Encouraging open and timely discussion within the Board and with the
Manager, allowing time and space for original and innovative thinking.
• Ensuring that the interests of shareholders and the Manager (and its
other clients) are well aligned, adopting a tone of constructive challenge,
balanced when those interests are not fully congruent by robust negotiation of
the Manager's terms of engagement.
• Drawing on Board Members' individual experience to support the Manager
in its monitoring and change management of portfolio companies, for the
benefit of all of the Manager's clients.
• Willingness to make the Board Members' experience available to support
the Manager in the long-term development of its business and resources,
recognising that the long-term health of the Manager is in the interests of
shareholders in HGT.
• Appreciating that the asset class, as well as the individual businesses
in which HGT invests, is not well understood by all shareholders, adopting a
policy of maximum transparency, consistent with the commercial interests of
the portfolio companies and clarity in reporting.
• Willingness to use all available means to communicate with shareholders
and potential investors and to meet shareholders and consider their views.
• Acceptance that the prime purpose of HGT is to provide an efficient
vehicle through which shareholders gain exposure to a well-managed,
concentrated and leveraged portfolio and that the Board should not seek to add
further investment risk.
A healthy corporate culture contributes to the long-term success of HGT. The
following observable outcomes may be indicative of the Directors' success in
embedding a healthy corporate culture in HGT's processes and policies and
actively promoting it through their behaviours:
• Continued support for HGT's shares and good, consistent trading
performance.
• The breadth and quality of the share register, including willingness of
shareholders to maintain their holdings over the long term rather than trade
them short term.
• The extent to which the partners and staff of the Manager are willing to
be long-term shareholders in HGT.
• Recognition of the transparency and clarity of reporting in HGT's
reports to shareholders and content disclosed on its website.
• Recognition of the quality of HGT's shares as an investment by the
number of broker recommendations as a long-term hold.
Social responsibility
The Board recognises that HGT has a responsibility to its shareholders,
stakeholders and the wider society. The Board endorses Hg's policy to invest
HGT's funds in a socially responsible manner. This includes the desire that
those businesses in which Hg invests are genuinely focused on making a
positive contribution to all stakeholders including employees, customers,
suppliers, shareholders and the wider society. Hg has been a signatory of the
UN Principles for Responsible Investment (UNPRI) since 2012 and the Board has
welcomed Hg's continuing commitment to set ambitious goals for various aspects
of environmental, social and governance (ESG) matters. Further details on how
Hg integrates responsible investing into the investment process can be found
on page 35 of the full Annual Report.
Under listing rule 15.4.29(R), HGT, as a closed-ended investment fund, is
exempt from complying with the Task Force on Climate-related Financial
Disclosures; however, the Board fully recognises the impact climate change has
on the environment and society and information on Hg's efforts on climate
change can be found on page 35 of the full Annual Report. The Manager is
committed to measuring and managing the carbon emissions associated with its
business operations, as well as the portfolio companies. Therefore, Hg
continues to work with the investee companies to raise awareness on climate
change risks, carbon emission and energy efficiency. Hg is a certified Carbon
Neutral company, committing to zero emissions by offsetting its entire carbon
footprint.
The Board monitors investment activity to ensure that it is compatible with
the policy and receives periodic updates from the Manager on its initiatives
and performance against its ESG goals. The Hg Responsible Investment Report
2020, Hg Responsible Investment Policy 2021 and Hg 2020/21 Carbon Footprint
Report can be found on Hg's website: www.hgcapital.com/responsibility.
Stakeholders
The Board seeks to understand the needs and priorities of HGT's stakeholders -
and these are taken into account during its discussions and as part of its
decision-making. As an externally managed investment firm, HGT does not have
any employees or customers. How the Board engages with each of HGT's group of
stakeholders is described in the following table:
Stakeholders Why they are important Board engagement
Shareholders Continued shareholder support and engagement are critical to the continuing HGT has c. 1,000 shareholders, including institutional and retail investors.
existence of the business and the delivery of its long-term strategy of its Over the years, HGT has developed various ways of engaging with its
business. shareholders, in order to gain an understanding of their views. These include:
A resolution to continue the life of HGT is put to the shareholders every five • Annual General Meeting (AGM): Whenever possible, HGT welcomes attendance
years. Having last been approved by shareholders at its AGM in 2020, a similar and participation from shareholders at the AGM. If attending, shareholders
resolution will be put to shareholders for approval at the AGM in 2025. have the opportunity to meet the Directors and ask questions at the AGM and
the Board really values the feedback and questions which it receives from
shareholders. The Manager delivers a presentation and is available to answer
any questions.
For further information about the upcoming 2022 AGM, please see
page 142 of the full Annual Report.
• Publications: The annual and interim results presentations, as well as
quarterly reports and factsheets, are available on HGT's website. Feedback
and/or questions HGT receives from shareholders enable us to evolve our
reporting which, in turn, helps to deliver transparent and understandable
updates.
• Shareholder communication: The Manager communicates with shareholders
periodically. During the period, the Manager has held c. 90 meetings with
current and potential investors including more than 400 people. All investors
are offered the opportunity to meet the Chairman or other Board members.
• Investor Relations updates: At every Board meeting, the Directors
receive updates on the share trading activity, share price performance and any
shareholders' feedback To gain a deeper understanding of the views of HGT's
shareholders and potential investors, the Manager also undertakes regular
Investor Roadshows . From time to time, the Board also commissions perception
studies based on in-depth interviews of shareholders, analysts and other
stakeholders. Their feedback is then taken into account when Directors discuss
the share capital, any possible fundraisings or the dividend. The willingness
of the shareholders, including the partners and staff of the Manager, to
maintain their holdings over the long-term period is another way for the Board
to gauge how HGT is meeting its objectives;
• Working with external partners: the Board also engages some external
providers, such as investor communications advisors to obtain a more detailed
view on specific aspects of shareholder communications, such as developing
more effective ways to communicate with investors.
The Manager Holding HGT's shares offers investors a publicly traded investment vehicle Maintaining a close and constructive working relationship with the Manager is
through which they can obtain exposure to Hg's diversified portfolio of crucial as the Board and the Manager both aim to continue to achieve
private equity investments. The Manager's performance is critical for HGT to consistent, long-term returns in line with HGT's investment objective.
deliver its investment strategy successfully and meet its objective to provide Important components in the collaboration with the Manager, consistent with
shareholders with consistent long-term returns in excess of the FTSE All-Share the Board's culture, are:
Index.
• Encouraging open discussion and adopting a tone of constructive
challenge,
• Drawing on Board Members' individual experience to support the Manager
in its monitoring and change management of portfolio companies, for the
benefit of all of the Managers' clients,
• Willingness to make the Board Members' experience available to support
the Manager in the sound, long-term development of its business and resources,
recognising that the long-term health of the Manager is in the interests of
shareholders in HGT.
The Company Secretary, In order to function as an investment trust with a premium listing on the The Board maintains regular contact with its key external service providers,
London Stock Exchange, HGT relies on a diverse range of advisers to support both through Board and Committee meetings, as well as outside of the regular
the Registrar, meeting all relevant obligations. meeting cycle. Their advice, needs and views are routinely taken into account.
In addition, the Management Engagement Committee, tasked with periodic reviews
the Depositary, of the external service providers, also holds relationship meetings and
formally hears, and acts on, their feedback, as appropriate.
the Broker,
the AIFM
Lenders Availability of funding and liquidity are crucial to HGT's ability to take Considering how important the availability of funding is, HGT aims to
advantage of investment opportunities as they arise. demonstrate to lenders that it is a well-managed business and, in particular,
that the Board focuses regularly and carefully on the management of risk.
Institutional Investors and proxy advisers The evolving practice and support of the major institutional investors and Recognising the principles of stewardship, as promoted by The UK Stewardship
proxy adviser agencies are important to the Directors, as HGT aims to maintain Code 2020, the Board welcomes engagement with all of its investors. The Board
its reputation for high standards of corporate governance, which contributes recognises that the views, questions from and recommendations of many
to the long-term sustainable success of HGT. institutional investors and proxy adviser agencies provide a valuable feedback
mechanism and play a part in highlighting evolving shareholders' expectations
and concerns.
Regulators HGT can operate only with the approval of its regulators which have a HGT regularly considers how it meets various regulatory and statutory
legitimate interest in how HGT operates in the market and treats its obligations and follows voluntary and best-practice guidance, while being
shareholders. mindful of how any governance decisions which it makes can affect its
shareholders and wider stakeholders, in the short and in the long term. More
detail, including HGT's engagement with the FRC, can be found in the Audit,
Valuations and Risk Committee report on page 123 of the full Annual Report.
Principal Decisions in 2021
Examples of the Board's principal decisions during the year, how the Board
fulfilled its duties under Section 172 of the Act and the related engagement
activities are set out below:
Principal decision Long-term impact Stakeholder Considerations and Engagement
To make commitments into new Hg funds Commitments made totalling $975 million across Hg's latest upper midmarket Consistent with its strategy and business model, HGT periodically enters into
fund and junior debt to support the long term growth in the NAV of HGT and formal commitments to invest in certain investment vehicles raised by Hg. HGT
further strengthen the relationship with the Manager, Hg. is the largest such investor in these vehicles and shareholders benefit from
the ability to deploy substantial capital in this manner in vehicles which
would otherwise be inaccessible. Furthermore, HGT retains a unique 'opt-out'
right associated with these investments which is further to the benefit of
shareholders.
To renew and extend HGT's credit facility In line with its approach to balance sheet management, HGT increased its The Board regularly reviews HGT's cash position and commitments, taking into
multi-currency revolving credit facility from consideration the impact on shareholders. The revised banking facility will be
£200 million to £250 million. This provides additional flexibility to manage used to support the long-term growth of HGT, to help facilitate the programme
HGT's balance sheet to support the growth of NAV. of investments undertaken by HGT over the coming years. This is discussed
further on page 94 of the full Annual Report.
To issue new shares in HGT Issuing new shares allows HGT to increase its liquidity in the market - an The Board regularly reviews the capital structure of HGT and seeks to issue
important consideration for shareholders. Furthermore, successful investment new equity when market conditions allow it and where such action would, in the
of the capital raised in new issuances will promote further growth in HGT's view of the Board, be in the best interests of HGT. When evaluating such
NAV. decisions, the Board takes full account of the impact of any such capital
raising on the existing shareholder base. The Board takes into consideration
the ability of HGT to deploy any additional funds in a timely and successful
manner. The continued demand for HGT's shares is an important indicator from
our existing and new investors.
To make new appointments to the Board of HGT and long term succession planning Continuing to develop and evolve the Board so that it contains an appropriate During the year, the Nomination Committee, and the Board, has frequently
mix of skills, diversity and experience is important to promote the long-term, considered the need for a strong succession plan and the recruitment of a new
sustainable success of HGT. Non-Executive Director following the announcement of Mr Duncombe's retirement
from the Board at the 2022 AGM of HGT. During these discussions, the need to
consider the long-term strategy and needs of HGT was continually taken into
account. More information is available at the report of the Nomination
Committee on page 127 of the full Annual Report
.
For and on behalf of the Board
Jim Strang
Chairman of the Board
4 March 2022
Extracts from Hg's review
Building businesses which change how we all do business
Hg is a specialist private equity investor focused on software and business
service companies.
Our business model combines deep sector specialisation with dedicated
operational support.
Hg invests in growth companies in expanding sectors, primarily via leveraged
buyouts in businesses with operations in or across Europe.
Hg's vision is to be the most sought-after private equity investor within our
sector focus,
being a partner of choice for management teams, to provide consistent,
superior returns for HGT and our other clients, while providing a rewarding
environment for Hg colleagues.
References in this annual report and accounts to the 'portfolio',
'investments', 'companies' or 'businesses' refer
to a number of investments, held as:
• indirect investments by HGT through its direct investments in
fund-limited partnerships (HGT LP, HGT 6 LP,
HGT 7 LP, HGT 8 LP, HGT Genesis 9 LP, HgCapital Mercury D LP ('Hg Mercury'),
HGT Mercury 2 LP, HGT Mercury 3 LP, HGT Saturn LP, HGT Saturn 2 LP, and HGT
Transition Capital LP) of which HGT is the sole limited partner.
• a secondary purchase of a direct interest in Hg's Genesis 6 fund
through HgCapital 6 E LP ('Hg 6 E LP'), in which HGT
is a limited partner.
• direct investments in renewable energy fund limited partnerships
(Asper Renewable Power Partners LP
('Asper RPP I LP'), of which HGT is a limited partner.
Hg Pooled Management Limited was authorised as an alternative investment fund
manager with effect from 22 July 2014. For further details, refer to pages
114-115 of the full Annual Report.
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.
About Hg
Europe's largest software and services investor with a transatlantic network
>25
years of investment
>280
employees across London, Munich and New York
>150
highly regarded institutional investors
>$40bn
funds under management
As at 31 December 2021
Overview
Hg is, itself, an entrepreneurially led, fast-growing business, 100% owned and
managed by its partners.
Hg began life as Mercury Private Equity, the private equity arm of Mercury
Asset Management plc. Mercury Asset Management was acquired by Merrill Lynch
in 1997. In December 2000, the executives of Mercury Private Equity
negotiated independence from Merrill Lynch, and Hg was established as a fully
independent partnership, owned entirely by its partners and employees.
Since then, Hg has worked hard to develop a unique culture and approach -
setting us apart from other investors. We are committed to building businesses
which change the way we all do business, through deep sector specialisation
and dedicated, strategic and operational support.
Today, Hg has more than 280 employees, representing the largest technology
investment team in Europe.
We have three investment offices, which are in London, Munich and New York,
with funds under management of more than $40 billion and serving more than
150 highly regarded institutional investors, including private and public
pension funds, insurance companies, endowments and foundations.
HGT is the largest client of Hg, which has been contracted to manage HGT's
assets since 1994 and offers investors a liquid investment vehicle, through
which they can obtain exposure to Hg's diversified network of unquoted
investments with minimal administrative burdens, no long-term lock up or
minimum size of investment - and with the benefit of a Board of independent
Directors and corporate governance. HGT's strategy is to invest in parallel
with all of Hg's current funds.
Investment strategy
Hg's investments are focused primarily on defensive growth buyouts in software
and business service companies operating in specific end-market 'clusters'
with enterprise values ('EVs') of £100 million to over £10 billion,
growing faster than the broader economy. We predominantly seek controlling
equity buyout investments in businesses headquartered in Europe and North
America, though such companies will often have a global footprint and customer
base.
Hg's objective is to pursue investment theses supporting long-term growth,
leveraging its expertise working in these sectors to implement initiatives
designed to maximise organic expansion, as well as through rolling up
fragmented sectors, over typical hold periods of approximately five years.
Hg has led over 170 investments in the software and service sector during the
last 25 years. This focus means that we have developed an institutional
expertise and a deep understanding of the markets and businesses in which we
invest.
Hg applies a rigorous approach when evaluating all investment opportunities.
Our objective is to invest in the most attractive businesses, rather than be
constrained by a top-down asset allocation.
This flexible approach to investment means that, at any given time, the Hg
portfolio is likely to comprise over 40 software and business service
companies with similar characteristics, but of different sizes, end-market
focus and maturity profiles.
Hg's office in New York enhances the ability to crystallise and develop
transatlantic investment opportunities, manage existing investments and make
bolt-on acquisitions, as well as continue to engage with - and ultimately sell
- portfolio companies to North American trade buyers. As the US has the
largest technology sector, this also helps to consolidate Hg's position as
Europe's leading software investor.
Hg Mercury
Lower mid-market
EVs: £100m-£450m
Hg Genesis
Mid-market
EVs: £450m-£1.3bn
Hg Saturn
Upper mid-market
EVs focus: >£1.3bn
One strategy over three funds across the size range in software and service
businesses
HGT has made commitments to invest on the same financial terms as all
institutional investors in Hg funds, with investments made into businesses
with enterprise values ranging from £100 million to over £10 billion.
The power of the portfolio
Hg has a unique approach and strategy, with a focus on achieving scale in
tightly defined clusters of expertise.
As a result, we have assembled a portfolio of more than 40 companies, sharing
similar characteristics, yet differing in size and maturity. This creates a
natural environment for knowledge-sharing, creating a network effect to drive
best practices and value-creation initiatives. This is why we believe in
collaboration and the 'power of the portfolio'.
This scale and focus enable our businesses to benefit from being part of one
larger organisation, while retaining their own identity with each management
team, incentivised by their own success.
The Hg portfolio, if taken as one company, would be one of the fastest-growing
software businesses in Europe.
The 'Hg sweet-spot' business model
Hg has a clear and robust business model, focused on long-term, consistent and
defensive growth, predominantly through investment in buyouts located
throughout Europe and North America. We seek companies which share similar
characteristics, often providing a platform for merger and acquisition
('M&A') opportunities.
We believe that such companies have the potential for significant performance
improvement.
We invest primarily in two main market sectors:
Software
Software is our largest sector of investment. We focus on businesses providing
B2B vertical market application software and data, regulatory software and
fintech and internet infrastructure.
We have invested in high-quality industry champions which have strong sector
reputations and diverse customer bases and which feature subscription-based
business models generating predictable revenues and cash flows. With more than
40 software investments in our portfolio, we bring a unique set of networks
and insights to help to support value creation in our businesses.
Tech-enabled services
Our business services investments focus on companies with high levels of
intellectual property, large fragmented customer bases and long-term and
stable customer relationships - and businesses which provide business-critical
services, preferably on a repeat or recurrent basis.
We target businesses with strong reputations within a niche and aim to grow
and scale these businesses, either organically within existing markets or
through acquisitions.
Deep knowledge and networks within our end-market clusters
Hg has a unique approach and strategy, with a focus on achieving scale in
tightly defined clusters of expertise. This specialisation helps us to build
deep know-how.
Tax & Accounting
18+ years
TeamSystem • Visma • Iris • Sovos • Azets • Silverfin • Prophix
• CaseWare • BrightPay • insightsoftware • Serrala
ERP & Payroll
18+ years
TeamSystem • Visma • Iris • Access • Transporeon • P&I •
Benevity • Revalize • BrightPay
Legal & Regulatory Compliance
15+ years
The Citation Group • Litera • Septeo • ProcessMap
Automation and Engineering
13+ years
MeinAuto • Trackunit • AUVESY-MDT • Geomatikk
Tech Services
12+ years
Commify • itm8 • team.blue • F24 • The Citation Group
Capital Markets & Wealth Management IT
8+ years
FE Fundinfo • Argus • SmartTrade • Gen II • Riskalyze • Pirum
Insurance
8+ years
GGW Holding • Howden Group • Fonds Finanz
Healthcare IT
7+ years
Evaluate • Medifox DAN • Lyniate • Intelerad • HHAeXchange
Note: Number of years refers to the number of years for which Hg has invested
in each cluster. As at 31 December 2021.
Working together
Dawn Marriott
Partner and Head of Portfolio, Hg
Sharing Hg know-how and experience
By virtue of the fact that Hg invests repeatedly in specific business models,
our dedicated portfolio team has been able to tailor a differentiated approach
to driving value creation during our ownership. Following each investment, our
portfolio team works with the management of our investee companies to focus on
a set of operational levers which is key to performance in an 'Hg
sweet‑spot' business model: growth, transformation, technology, cyber
security, data analytics, ESG and talent. For each of these levers, the
portfolio team has the experience and deep knowledge of best practices to help
drive value creation, in collaboration with management.
Every company can access the team, yet the nature of support can take a
variety of forms. Often, our portfolio team members provide direct support,
taking on roles to help the business to pursue growth more quickly. Another
option is for our experienced industry experts to mentor senior executives,
helping them to build more scalable functions. In other instances, the support
comes through introducing management teams to their counterparts in other
companies in which Hg is invested, specifically those who have faced
comparable challenges.
"Hg always has the long term perspective at hand. The team inspires us as
leaders, supports and facilitates strategic discussions, helping us get in
touch with other software-companies to learn from, both other Hg portfolio
companies but also outside of their portfolio."
Merete Hverven, CEO, Visma
2021: 88
Portfolio team-led online events
5,750
total people in attendance
The Hg portfolio community
We view all our business management teams as a part of the Hg portfolio
community and that means promoting a culture of working together to problem
solve and innovate more rapidly. One of the most powerful ways in which we
motivate change is through peer‑to‑peer collaboration, allowing management
teams the opportunity to exchange ideas and insights, and learn from others
across the Hg portfolio and our network of experts. In the last year, we've
offered portfolio companies a full end‑to‑end digital engagement
experience, by hosting virtual events and facilitating an increase in activity
on the Hg online collaboration platform, Hive.
Virtual events
We have been delighted by the success of our virtual events this past year,
which have continued to play a significant role in driving engagement across
the entire portfolio of Hg investment companies, bringing the Hg family
together during unprecedented times. Over 2021, we have had a diverse calendar
of webinars, hangouts, summits and virtual networking events and, so far this
year, we have hosted 51 events, reaching over 5,000 people.
Value creation
• We have over 50 senior operational experts who work with our portfolio
management teams to drive impact through specific value creation projects.
Additionally, we have a network of trusted third party associates and
partners;
• The Portfolio team provides decades of accumulated IP on operational best
practices, as well as the project execution resource to help implement them;
• We conduct value creation diagnostics upfront, comparing a company's
operational maturity against our database of KPIs and best practices, to
identify the highest potential projects to pursue;
• We then support the company in building a value creation plan to help
achieve those enhancements.
The Hg Portfolio community
We work hard to create opportunities for connection and collaboration across
the Hg portfolio. We facilitate frequent opportunities for individuals on
management teams to network, share best-practice, ideas and learn from one
another.
Our focus areas
From sharing best practice and resources through to tailored teams of
technical experts, we work closely with the companies in which we invest to
ensure that they gain the tools and guidance required for business success.
For further information, please visit: hgcapital.com/working-together
"You do a splendid job of keeping us connected and the monthly sessions are
really useful. Whilst it has been an unusual year (again!), it has been great
to be part of the wider Hg community. So thank you very much, it is
appreciated."
Richard Hanscott, CEO Commify
Hive
Hg's online community for everyday collaboration
Hive, Hg's online portfolio engagement platform, enables collaboration at
scale across the entire Hg family and plays a central role in Hg's value-add
proposition to portfolio companies. Hive provides members with a space to
network with peers, access Hg events and a resource to share specialist
knowledge and expertise through multiple specialist communities.
Spotlight on our CEO community
Our CEO community has gone from strength to strength over the last two years.
During the pandemic, we hosted weekly 'hangouts' for our CEO community to
share live experiences, problem-solve and seek advice from one another. The
hangouts proved so valuable that they have remained ever since and the
community continues to prosper, with many referring to the trusted community
as a 'group of friends'.
2021: >700
new members over the year
2,500
active members and growing!
For further information, please visit: hive.hgcapital.com
"COVID-19 has reinforced the need for us to continue to invest in our people
and our expertise, especially given our focus on working with the very best
management teams in our target clusters and to actively help them to build
great businesses."
Steven Batchelor, Chief Operating Officer, Hg
>280
members of the team
3
investment offices in London, Munich and New York
Our team
Hg succeeds through the analysis and understanding of new and emerging
dynamics in the clusters in which it invests. This requires profound knowledge
of technology, markets and business practices. To this end, we employ diverse
and exceptionally talented teams to identify and execute investment
opportunities and accelerate value creation during our ownership. This
specialisation - in both investment selection and portfolio management -
requires significant resources, and we have built a business employing more
than 280 people, including more than 160 investment and portfolio management
executives and other professionals. Our investment and portfolio management
executives come from a range of backgrounds and experience, including private
equity, consulting, investment banking, accounting and industry specialists.
Our portfolio team comprises a mix of senior operators and functional
specialists, typically with substantial experience in their respective
specialist operational and strategic roles. Investing primarily in European
businesses, many of which have a global footprint, requires time and a deep
understanding of local cultures. Accordingly, our people come from around the
globe, including 16 European countries, Asia, Africa and the USA. On average,
our partners have 15 years' experience in the management of private
businesses.
Talent attraction and talent development
To position ourselves as a best in class recruiter, Hg's recruitment and
selection processes are rigorous and agile. These, along with our strong
brand, leadership, sector focus, fund performance, vibrant culture and only
working with recruitment partners who ensure that their search methodology is
inclusive, providing diverse talent, allow us to attract and hire the best
talent in our industry.
We have enhanced our talent processes so that we can identify and accelerate
the development of our top performers and high‑potential talent within the
business. We believe this to be the basis of effective career and
succession‑planning and to support this we have hired a Head of Talent, who
joined in January this year to focus on both our Talent Acquisition and Talent
Development and to continue to build and enhance our practices.
Employee engagement
Our people are highly motivated by, and committed to, delivering outstanding
value to HGT, our other institutional clients and our portfolio company
leadership teams. They are engaged by their work, our values and the
opportunity to grow to their full potential within Hg. Our values have evolved
over many years and are embodied in our working culture; these are aligned
with our performance and reward structures. Hg works hard to ensure that our
employees are engaged. We use independent external benchmarks to gauge levels
of engagement and take appropriate actions to ensure the highest possible
levels of engagement. We have a strong focus on career and personal
development, providing a range of development opportunities to enable our
talent to reach their full potential and perform at their best.
Developing future leaders
We are explicit about those behaviours which we wish to encourage at Hg and
have aligned recruitment, training, coaching, performance and rewards to our
values for everybody across the organisation, including our leadership. We
know that longevity of success means doing it the right way, thinking long
term and always being willing to listen and learn. These values can be seen
and felt everywhere you look, around our offices and in everyday interactions
- it's really what makes us Hg.
For a description of Hg's key staff please visit: hgcapital.com/our-people
"With diversity, you source and analyse deals, ask and answer questions and
manage teams differently. It adds up to better investment and business
decisions. The more complex the challenge at hand, the greater the returns."
Nic Humphries, Senior Partner, Hg
>160
investment and portfolio management executives
8
clusters of expertise
Diversity and inclusion
Hg has introduced several new policies and built on its existing ones, as part
of a wider initiative around diversity and inclusion. We have an established
D&I steering group, comprising a range of individuals from across the
firm. Its aim is to promote a culture of inclusion which clearly values
diversity in all of its forms. We have several global initiatives - gender
balance, flexible working, mentoring programmes, training and awareness events
- to drive internal change. We also look to support events such as Black
History month, International Women's day and Mental Health Awareness week.
This is also echoed and supported through our HR learning and development
initiatives, including structured mentoring programmes, recruitment processes
and training, embedding awareness of unconscious bias and inclusion.
Hg will maintain its commitment to industry-wide initiatives such as Level 20,
a not‑for‑profit organisation aligned around a common vision to inspire
more women to join the industry. Hg senior partner Nic Humphries continues his
role on Level 20's advisory council.
Hg is an active participant in the Institutional Limited Partners
Association's 'diversity in action' initiative, acknowledging our ongoing
commitment to take concrete steps to advance diversity, equity and inclusion
across our organisation and the industry more broadly.
In addition, last year we welcomed our first interns through the
#10000blackinterns programme, helping black students gain experience and
kick‑start their career in investment management. This year we have
increased the number of interns we have recruited and expanded the number of
areas of the business that they will gain experience in.
We are also excited to partner with Sponsors for Educational Opportunity (SEO)
in London and New York as they help prepare talented students from ethnic
minority or low socio-economic backgrounds for career success.
"At Hg, we aim to attract and maintain a team of the best-possible investment
and operational talent. To do this, we need to ensure that we're building this
team from the broadest range of potential employees. Having a clear strategy
and committed team looking at diversity and inclusion, with full support from
the firm's senior leadership team, is crucial."
Martina Sanow, Partner and Deputy Chief Operating Officer, Hg
Hg is now a member of the LGBT Great network and as part of this partnership
has contributed to two of their research projects: LGBT+ investing lens:
research exploring the practice of investing for financial return while also
considering the benefits to those who identify as LGBT+, such as improving
economic opportunities or social inclusion for the LGBT+ community.
Diversity Data: research exploring the concept of extending mandatory
organisational diversity reporting beyond gender to other diversity dimensions
such as ethnicity and sexuality. Hg hopes that this research will be a
catalyst for positive change and are proud to be a part of it.
Responsible investment
"We recognise the importance of constantly moving forward with ESG
improvements. The world does not stand still and we continually assess what we
are doing on ESG to stay ahead. The pandemic has certainly accelerated
everyone's - not only Hg's - focus and commitment in this space."
Caroline Löfgren, Chief Sustainability Officer, Hg
Why responsible investment is important to us
Hg engages in Responsible Investment because it sits right at the core of our
Purpose.
We are trusted to improve the future of millions of investors by building
sustainable businesses for tomorrow. This is our purpose statement, our reason
for being - it is how we see our place in society and our contribution to it.
We are totally committed to this and it is embedded in everything we do, in
every decision, every day and for every individual.
What this means in practice is that we look to grow sustainable businesses
which are great employers and good corporate citizens, whilst also generating
strong returns for the millions of pensioners and savers who are invested with
us. Everyone at Hg is ultimately pulling together towards this goal.
This commitment supports the backbone of our investment philosophy and has
helped us to determine a very focused approach, which has evolved over the
last 20 years. Our focus is to invest exclusively in growing software and
services businesses. We look to ensure that both our time and our capital
support the sustainable growth of these knowledge businesses. These businesses
then contribute to society by changing and modernising how their customers
work, whilst providing quality employment opportunities for thousands of
people worldwide, across innovative and growing sectors.
In turn, we believe that responsible business practices help to generate
superior long-term performance, captured as investment returns to our
investors. In this way, all stakeholders' goals align, with contributions to
investors, the businesses themselves, employees, customers, suppliers,
shareholders and wider society. As with other operations and functions, we
take an active interest in how our companies manage Environment, Society and
Governance ('ESG') risks and opportunities. It is much more than screening
processes to ensure we do not invest in certain companies.
Our sector focus and expertise also mean that we have a better understanding
of which ESG metrics are most material to service and software companies. We
focus on these metrics to help build world-class ESG practices across our
portfolio and achieve most impact.
Finally, we actively champion this topic and talk about our approach openly
both internally and externally. We want all our employees to be proud of what
we do, because they should be, and we want our investors to be confident in
our intentions when they commit capital to us for ten years or more.
Matthew Brockman, Managing Partner, Hg
For more information, please go to hgcapital.com/responsibility
To watch our Responsible Investing video, please go to
hgcapital.com/responsibility
Responsible investment (RI) at Hg
We continue to demonstrate our commitment to RI publicly - through a number of
initiatives. We have been signatories of the United Nations‑supported
Principles for Responsible Investment ('UNPRI') since 2012 and are proud to
have retained the top score, AA++ in their latest assessment in 2020,
cementing our reputation as a leader in ESG initiatives and innovation.
We recognise that climate change is one of the most important topics in the
ESG space and at the top of the agenda for society, Hg and our investors. As a
result, Hg in a founding member of the UK network of the Initiative Climat
International ('iCI'). Endorsed by the UNPRI, iCI is a network of Private
Equity firms working collaboratively to tackle climate change in our industry.
Hg is a member of the UK Operating Committee of iCI and is actively supporting
the NetZero working group.
In 2021, we made some big commitments to support our ambition to help limit
climate change. Hg joined over 220 asset managers in signing the Net Zero
Asset Managers initiative
hgcapital.com/hg-joins-leading-private-equity-investors-commit-to-net-zero/,
to support the global efforts to limit warming to 1.5 degrees Celsius. Hg was
also one of the first PE firms globally to have their carbon reduction targets
approved by the Science Based Targets initiative, in line with their PE
guidance.
hgcapital.com/hg-joins-group-of-six-pioneering-firms-representing-e133bn-aum-to-combat-climate-change-by-setting-ambitious-science-based-targets-for-the-industry/
For more information about Hg's commitment to limit global climate change,
please see our first TCFD report here:
hgcapital.com/wp-content/uploads/2021/11/Taskforce-on-Climate-related-Financial-Disclosures-Report-2021-Final.pdf.
For Hg's firm level footprint and carbon neutrality see our detailed report
here:
hgcapital.com/wp-content/uploads/2021/09/Hg-Carbon-Footprint-2020-2021-Report-Final.pdf
Another topic that is close to our heart is diversity, equity and inclusion
(DEI). We continue to focus on DEI on a firm level and are proud to be able to
say that 48% of our employees are women. Our investment team consists of 35%
women, which is well above the industry average. We are engaging with our
businesses on this topic too. In 2021, we created our Portfolio DEI Council, a
group of 10 portfolio companies representing different regions and sizes, to
collaborate on DEI. Over the next few months, the group will work together to
help develop a playbook for the rest of the portfolio to learn from.
For more information and our latest DEI report please see
hgcapital.com/diversity-and-inclusion/
ESG in the deal process
ESG is embedded into the entire deal process, from screening to exit. We are
very clear, as outlined in our exclusion list, on the types of business in
which we do not invest. During due diligence, we assess companies for
compliance with relevant laws in relation to ESG, H&S, bribery and
corruption.
All our businesses are assessed against our Sustainable Business Framework as
part of onboarding and annually thereafter. We are confident that our
assessment is one of the most comprehensive assessments on the market; it
covers over 170 metrics across key areas that are most relevant to tech
businesses and takes external frameworks, such as SABS, ILPA's diversity in
action initiative and the ESG Data Conference project, into account.
However, our ESG onboarding is not limited to our Sustainable Business
Framework. In addition we conduct separate assessments on cybersecurity, data
privacy, carbon footprints and climate change risks.
Each year we review and update our Sustainable Business Framework to account
for new topics, trends and regulations. In 2021, we included 20 additional
questions to cover further aspects of data privacy, anti-competitive
behaviour, diversity and inclusion and climate change. All portfolio companies
are assigned a score from 0-10 and receive an action list to support
improvement. Hg's ESG team provide support to help advance the businesses ESG
performance and each business is then reassessed on an annual basis.
Hg's Sustainable Business framework
Hg's Sustainable Business framework outlines key ESG focus areas for Software
and Services companies. Please see https://hgcapital.com/responsibility/
(https://hgcapital.com/responsibility/) for further details about the
framework.
A signatory to the UNPRI since 2012.
AA++ 2021 PRI assessment score:
'A+' for strategy and governance and
'A+' for private equity ownership
Hg is a founding member of the UK network of the Initiative Climat
International (iCI)
Hg is one of the first PE firms globally to have committed to and had targets
approved in line with the SBTi.
Hg is committed to report our ESG progress in line with several recognised
external standards.
For more information and to watch our Responsible Investing video, please go
to hgcapital.com/responsibility
The Hg Foundation
Removing barriers to education & skills in technology
The Hg Foundation aims to develop the skills required for employment within
the technology industry, focusing on individuals who may otherwise experience
barriers to access. The Foundation is funded by Hg through a proportion of
carried interest from current and future Hg funds, a proportion of Hg's annual
profits and also through charitable activities carried out across the firm.
The Foundation acts independently of Hg and grant decisions are made by the
Board of Trustees.
2021 saw Hg Foundation set up four more partner programmes taking the total
number of partnerships to eight.
$8.5m
commited to date
8
Partnerships
>8,000
students directly supported
For more information, please visit the Hg Foundation's website:
www.thehgfoundation.com
Year in review
Net asset value (NAV)
During the year, the NAV of HGT increased by £715 million, from
£1.3 billion at 31 December 2020 to £2.0 billion at 31 December 2021.
Attribution analysis of movements in NAV
Revenue Capital Total
£000 £000 £000
Opening NAV as at 1 January 2021 19,946 1,271,070 1,291,016
Realised capital and income proceeds from investment portfolio in excess of 31 11,265 81,478 92,743
December 2020 book value
Net unrealised capital and income appreciation of investment portfolio 44,084 614,837 658,921
Net realised and unrealised gains from liquid resources 648 (5,701) (5,053)
Share issue - 141,231 141,231
Dividend paid (21,660) - (21,660)
Expenditure (10,797) (1,949) (12,746)
Taxation 192 - 192
Investment management costs:
Priority profit share - current year paid (16,385) - (16,385)
Priority profit share - reallocation between capital and income 7,821 (7,821) -
Carried interest - current year paid - (32,472) (32,472)
Carried interest - current year provision - (90,063) (90,063)
Closing NAV as at 31 December 2021 35,114 1,970,610 2,005,724
Analysis of NAV movements
Several underlying factors contributed to the increase in NAV. Positive
impacts were the £658.9 million revaluation of the unquoted portfolio and
uplifts of £92.7 million on the realisation of investments, compared with
their carrying value at the start of the year. Shares issued during the year
contributed a further £141.2 million.
Reductions in NAV included: the payment of £21.7 million of dividends to
shareholders, carried interest paid of £32.5 million and a £90.0 million
increase in the provision for future carried interest.
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.
Attribution analysis of movements in the value of investments
During the year, the value of the unrealised investments increased by
£658.9 million, before the provision for carried interest. The majority of
the increase, £611.6 million, relates to increases from profit growth in the
underlying investments. An increase in valuation multiples increased the value
of investments by £297.2 million.
Acquisitions net of realisations at carrying value of £213.3 million
increased the value further and negative currency movements of £46.2 million
reduced the value of the unrealised portfolio. An increase in net debt of
£204.3 million contributed negatively to the unrealised portfolio.
Top 20 portfolio trading performance as at 31 December 2021
The top 20 investments (representing 78% of total investments by value) have
delivered strong sales growth of 27% and
EBITDA growth of 30% over the last 12 months ('LTM').
This is consistent with high double-digit trading performance that the HGT
portfolio has demonstrated over many years.
The business model characteristics of the companies in which we are invested
give us confidence that this sustainable growth can be achieved consistently,
going forward.
More than 80% by value of the top 20 businesses within the portfolio are
seeing double-digit revenue growth, and more than 75% have delivered
double-digit EBITDA growth over the last 12 months.
Profits continue to grow at a faster rate than revenues, in part due to the
continued investment made into the cost base of several companies, for
example, to finance increased sales and marketing capabilities, strengthen
management and new product development, all of these continue to drive future
performance.
We have seen very robust and consistent trading performance from the majority
of the portfolio, with particularly strong growth from Septeo,
insightsoftware, Access, Intelerad, Howden, and Transporeon. Where a company
does not perform as well it is reflected in its valuation.
For further information on how individual companies have performed over 2021 -
please refer to the realised and unrealised valuations table on page 39 of
the full Annual Report.
Valuation and net debt analysis as at 31 December 2021
Our valuation policy is applied consistently, in accordance with the IPEV
Valuation Guidelines. Each company has been valued individually, based on the
trading multiples of comparable businesses and relevant and recent M&A
activity; this resulted in an average EBITDA multiple for the top 20
investments of 27.4x (22.1x at 31 December 2020).
The basis of the approach continues to be to apply a relevant multiple to
suitable earnings-based performance metric. We take a considered approach in
determining the level of maintainable earnings to use in each valuation, in
line with the IPEV Valuation Guidelines. An earnings-based valuation is most
appropriate where the investment is an established business with a stream of
maintainable earnings. Where the company has negative earnings or
significantly depressed earnings, a revenue based valuation can be used. Most
holdings have been valued using the LTM earnings, or the best available
information at the reporting date. The earnings figure used may be adjusted on
a pro-forma basis reflecting acquisitions, disposals or other adjustments to
the extent a buyer would make such adjustments. 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 also making use of M&A
data.
We then cross-check the existing valuation against a range of other valuation
techniques. We also use back testing to understand substantive differences
that legitimately occur between an exit price and the previous fair value
assessment to inform our valuation policy.
Our companies make appropriate use of gearing, with a weighted average net
debt for the top 20 of 7.1x LTM EBITDA (6.4x at 31 December 2020). Many of
our businesses have highly predictable, strong earnings growth and are very
cash generative, enabling us to use debt to reduce their cost of capital and
improve returns on the equity we hold.
Outstanding commitments of HGT
At 31 December 2021, HGT held liquid resources of £371 million and had
outstanding commitments of £992 million, as listed below. We anticipate the
majority of these outstanding commitments will be drawn down over the next
three to four years (2022-26) and are likely to be partly financed by cash
flows from future realisations. Additionally, to mitigate the risk of being
unable to fund any draw-down under its commitments to invest alongside Hg's
funds, the Board has negotiated a right to opt out, without penalty, of HGT's
obligation to fund such commitments, where it does not have the funds to do so
or certain other conditions exist. HGT also has access to a £250 million
bank facility which was 60% drawn as at 31 December 2021.
Fund Fund Original commitment £million (1) Outstanding commitments as at 31 December 2021 Outstanding commitments as at 31 December 2020
vintage
£million % of NAV £million % of NAV
HGT Saturn 3 LP 2022 627.5 (2) 627.5 31.3 - -
HGT LP Various 92.3 (3) 92.3 4.6 1.3 0.1
HGT Saturn 2 LP 2020 295.3 (4) 67.8 3.4 200.6 15.5
HGT Genesis 9 LP 2020 302.3 (5) 66.2 3.3 263.2 20.4
HGT Mercury 3 LP 2020 96.6 (6) 64.0 3.2 102.9 8.0
HGT 8 LP 2018 350.0 51.5 2.6 9.7 0.8
HGT Saturn LP 2018 150.0 15.9 0.8 7.9 0.6
HgCapital Mercury D LP 2011 60.0 3.3 0.2 3.3 0.3
HGT Mercury 2 LP 2017 80.0 1.8 0.1 4.7 0.4
HGT 7 LP 2013 200.0 1.0 - 1.2 0.1
Asper RPP I LP 2006 18.2 (7) 0.6 - 0.6 -
HGT Transition Capital LP 2018 75.0 - - 49.6 3.8
HGT 6 LP 2009 285.0 - - 2.3 0.2
Hg 6 E LP 2009 15.0 (8) - - 0.1 -
Total 991.9 49.5 647.4 50.2
Liquid resources 371.5 18.5 187.6 14.5
Net outstanding commitments unfunded by liquid resources 620.4 31.0 459.8 35.7
( )
(1 )Excluding any co-investment participations made through HGT LP.
(2 )Sterling equivalent of $850 million.
(3 )Sterling equivalent of $125 million of junior debt.
(4 )Sterling equivalent of $400 million.
(5 )Sterling equivalent of €360 million.
(6 )Sterling equivalent of €115 million.
(7 )Sterling equivalent of €21.6 million.
(8 )Partnership interest acquired during 2011.
( )
Investment portfolio of HGT
Fund limited partnerships Residual Total Portfolio
valuation(1)
cost
£000 value
£000 %
Primary buyout funds:
HGT 8 LP 270,227 739,398 38.2
HGT 8 LP - Provision for carried interest - (96,206) (5.0)
HGT Saturn 2 LP 213,683 336,503 17.4
HGT Saturn LP 140,591 288,483 14.9
HGT Saturn LP - Provision for carried interest - (31,111) (1.6)
HGT Genesis 9 LP 235,204 284,203 14.7
HGT Mercury 2 LP 62,471 168,055 8.7
HGT Mercury 2 LP - Provision for carried interest - (23,680) (1.2)
HGT LP 108,172 153,739 7.9
HGT 7 LP 24,226 87,408 4.5
HGT 7 LP - Provision for carried interest - (17,477) (0.9)
HGT Mercury 3 LP 30,978 35,117 1.8
HgCapital Mercury D LP 2,316 15,373 0.8
HgCapital Mercury D LP - Provision for carried interest - (3,105) (0.2)
Total buyout funds 1,087,868 1,936,700 100.0
Renewable energy funds:
Asper RPP I 5,040 313 -
Total investments net of carried interest provision 1,092,908 1,937,013 100.0
( )
(1)Includes accrued income but before the deduction of the fund level
facility.
Hg cluster by value
31% Tax & Accounting
25% ERP & Payroll
10% Healthcare IT
9% Legal & Regulatory
8% Capital Markets & Wealth Management IT
7% SME Tech & Services
5% Automation & Engineering
5% Insurance
Geographic spread by value
34% UK
26% North America
17% Germany
14% Scandinavia
9% Other Europe
Investment vintage by value
27% 2021
29% 2020
3% 2019
27% 2018
6% 2017
8% pre 2017
Investments and realisations
Investments
Over the course of the year, Hg invested a total of £5.3 billion on behalf
of its clients, with HGT's share being £424 million.
The vast majority of our investments are generated by establishing and
developing relationships with companies 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 clusters.
We continue to look for businesses which share similar underlying business
model characteristics, such as: high levels of recurring revenues; a product
or service which is business critical, but typically low spend; low customer
concentration and low sensitivity to market cycles. This is a theme which runs
through many of our new investments - and we believe that companies with these
characteristics will remain in high demand across market cycles.
New investments in the year to 31 December 2021
Insightsoftware
£55.1m invested on behalf of HGT including £7.1m in co-investment
In September 2021, Hg completed an investment in insightsoftware, a global
provider of enterprise software solutions for the 'Office of the CFO'.
Headquartered in Raleigh, USA, with offices around the world, insightsoftware
has more than 1,000 employees serving over 600,000 global users.
Howden
£42.0m invested on behalf of HGT
In March 2021, Hg completed an investment in Howden Group Holdings (Howden
Group), the international insurance intermediary. Founded in 1994 and
headquartered in London, Howden Group is a leading international insurance
distribution group.
Benevity
£31.6m invested on behalf of HGT, including £3.6m in co-investment
In January 2021, Hg completed an investment in Benevity Inc (Benevity), a
global leader in corporate purpose cloud software. Hg led the investment, made
from the Hg Saturn 2 Fund, in partnership with Benevity's current investors,
General Atlantic and JMI Equity, which will remain significant investors in
the business, alongside the Benevity management team.
Trackunit
£26.6m invested on behalf of HGT
In June 2021, Hg completed an investment in Trackunit, a global leader in
software-led telematics solutions for off-highway vehicles and the
construction market, alongside Goldman Sachs and GRO Capital. Trackunit is a
driving force in the digitisation of the construction sector, serving
equipment manufacturers, rental companies and contractors, connecting
construction equipment and processing data to the cloud to deliver value-added
insights.
HHAeXchange
£24.0m invested on behalf of HGT
In October 2021, Hg completed an investment in HHAeXchange (HHAX). HHAX offers
a comprehensive software as a service (SaaS) platform to its customers that
improves patient outcomes, drives operational efficiency and increases
compliance across the homecare ecosystem. Its solutions are delivered through
subscription-based enterprise and mobile tools and facilitate over
125 million annual visits for 675,000 caregivers across more than 44 states.
Today, HHAX has offices in North America and development facilities in Europe
and Asia.
MMIT Evaluate
£23.4m invested on behalf of HGT
In September 2021, Hg completed an investment in Managed Markets Insight &
Technology, LLC. ('MMIT'), the trusted go-to market partner solely focused on
solving the 'what and why' of market access in the pharma sector. MMIT will
join forces with Evaluate Ltd a leading provider of commercial intelligence
and predictive analytics to the pharmaceutical industry. Hg will share joint
control of the combined business.
Serrala
£23.1m invested on behalf of HGT
In November 2021, Hg completed an investment in Serrala, a fast-growing global
financial automation and B2B payments software company. Founded in 1984 and
based in Hamburg, Germany, Serrala provides software solutions for financial
automation and B2B payments to medium-sized to large Enterprise customers
globally, with a strong footprint across Europe and the US.
Revalize
£18.7m invested on behalf of HGT
In December 2021, Hg completed an investment in Revalize, a worldwide leader
in sector-specific revenue operations software for manufacturers, their
distributors and their specifiers. Revalize will continue to be supported by
existing shareholders TA Associates, ST6, and management.
Prophix
£17.1m invested on behalf of HGT
In February 2021, Hg completed an investment in Prophix, a global leader in
corporate performance management (CPM) software. Founded in 1987 and based in
Ontario, Canada, Prophix is a leading provider of CPM software serving
mid‑market companies across multiple industries worldwide, providing
planning, budgeting and financial reporting software into the 'office of the
CFO'.
Riskalyze
£15.9m invested of behalf of HGT including £6.8m in co-investment
In September 2021, Hg completed an investment in Riskalyze, Inc., an
industry-leading, risk-centric wealth management platform serving financial
advisors, enterprises, and asset managers. Riskalyze's industry-leading client
and portfolio risk technology is rapidly emerging as an industry standard for
advisor, client and portfolio risk analytics across the US wealth management
ecosystem. Today, Riskalyze's platform supports tens of thousands of financial
advisors who use it to manage millions of client accounts with over
$400 billion in assets.
Dext
£15.6m invested on behalf of HGT including £3.9m in co-investment
In May 2021, Hg completed an investment in Dext, a leading provider of
pre-accounting software which helps to automate the process of extracting and
classifying data from receipts, invoices and documents (whether digital or
paper) for the purposes of adding to bookkeeping / general ledger tools.
Dext's software integrates with over 2,500 accounting, payroll and payment
software providers, providing significant customer benefits in terms of making
otherwise highly manual workflows more efficient, accurate and facilitating
better and quicker data analysis and reporting.
TeamSystem
£14.3m invested on behalf of HGT
In February 2021, Hg completed an investment in TeamSystem, an Italian
provider of ERP and business management software to SMEs and professionals via
the Hg Genesis 8 fund. Hg has held a minority position in TeamSystem since
2015, following its majority exit to a vehicle indirectly held by Hellman
& Friedman Capital Partners VII, L.P.
Geomatikk
£11.4m invested on behalf of HGT, including £4.0m in co-investment
In February 2021, Hg completed an investment in Geomatikk Group, a
tech‑enabled services champion, managing critical
'check‑before‑you‑dig' safety assessments to network owners, contractors
and consulting engineers within Norway, Sweden and Finland. Hg will support
Geomatikk with its extensive experience in scaling tech champions across
Europe. Hg will become the majority investor, with founders and management
remaining as significant investors in the business.
AUVESY-MDT
£8.1m invested on behalf of HGT
In May 2021, Hg completed an investment in AUVESY-MDT ('AUVESY'). Founded in
2007 and headquartered in Germany, AUVESY is a provider of version control
software for smart production machinery and other industrial Internet of
Things (IoT) devices. AUVESY manages over 5 million industrial IoT devices
across 45 countries, serving over 700 loyal customers.
BrightPay
£6.5m invested on behalf of HGT
In November 2021, Hg completed an investment in BrightPay and Relate Software.
The two businesses will join forces to create a software champion serving
payroll and accounting bureaus and SMEs across the Republic of Ireland and the
United Kingdom. Hg is the majority investor in the combined business.
ProcessMap
£5.2m invested on behalf of HGT
In December 2021, Hg completed an investment in ProcessMAP Corporation
("ProcessMAP"), a leading Environmental, Health and Safety ('EHS') software
platform provider. Headquartered in Florida, ProcessMAP has nearly 300
employees based in the USA, Canada, the UK, Germany and India.
Follow-on investments
Litera
£28.7m invested on behalf of HGT
Over 2021, Hg completed two further equity investments into Litera, a leading
provider of innovative technology solutions to legal organisations. The first
of these was to fund the acquisition of Kira, a provider of machine learning
contract review and analysis software. An additional investment was made to
provide Litera with the ability to expand into new areas and geographies.
FE fundinfo
£19.3m invested on behalf of HGT
In 2021, the Hg Genesis 9 Fund completed the acquisition of a stake in FE
fundinfo, the global fund data and analytics business catering to asset
managers and fund distributors, headquartered in London. Hg initially invested
in fundinfo in January 2017 via the Hg Mercury 1 Fund, and it was later
combined with F2C and Financial Express 'FE'), rebranding as FE fundinfo, an
acquisition financed by an investment from the Hg Mercury 2 Fund.
Sovos
£10.1m invested on behalf of HGT
In August 2021, HGT took part in an equity refinancing to fund further M&A
at Sovos, a leading global provider of tax compliance software solutions that
help customers manage an increasingly complex end-to-end tax determination
& regulatory reporting process. Headquartered in Boston, Massachusetts,
Sovos has a significant presence in the US, Europe & Latin America and
enjoys typically resilient 'Hg sweet-spot' characteristics, including more
than 90% recurring revenue, high customer loyalty & strong cash
generation.
Silverfin
£8.2m invested on behalf of HGT, including £4.8m in co-investment
In June 2021, the Hg Mercury team completed a further investment in
Silverfin, a cloud platform for accountants that improves the efficiency,
competitiveness and profitability of compliance services, and powers the
development and delivery of advisory services.
GGW
£4.9m invested on behalf of HGT
In September 2021, Hg agreed a further investment in GGW, a leading Property
& Casualty focused insurance broker principally serving SMEs in the DACH
region. This equity will help to acquire additional high quality brokers.
Visma
£4.6m invested on behalf of HGT
In September 2021, Hg agreed to make a small follow-on investment into Visma,
a leading provider of business-critical software to private and public
companies in Europe. This investment was made alongside a number of new,
leading institutional investors.
New Investments since the year end
Fonds Finanz
Estimated £8.0m invested on behalf of HGT
In February 2022, Hg completed an investment in Fonds Finanz, a leading
tech-enabled financial intermediary pool in the German insurance sector.
Founded in 1996 and headquartered in Munich, Fonds Finanz serves more than
28,000 customers including brokers, distributors, insureTechs and banks across
Germany. With a comprehensive software, advisory and service offering, Fonds
Finanz gives customers access to a full-service platform, comprising products
from more than 500 insurance and financial product vendors in Life, Health,
Property & Casualty and Investment funds.
Pirum Systems
Estimated £9.4m invested on behalf of HGT
In December 2021, Hg announced an investment in Pirum Systems, a leading
provider of post-trade automation and collateral management technology for the
global securities finance industry. Pirum was founded in 2000 to provide
advanced, centralised and secure reconciliation services for financial market
participants. Pirum's software provides a secure processing hub which
seamlessly links industry participants, allowing them to process and verify
key transaction details electronically. This delivers significant trade and
collateral efficiency, lowers costs and enhances regulatory compliance for its
network of clients. Pirum's products assist 90 of the most prestigious global
financial institutions to process over $3 trillion of transactions daily. This
is due to complete in June 2022.
Waystone
Estimated £31.4m invested on behalf of HGT
In January 2022, Hg announced an investment in Waystone Group, a leading
provider of institutional governance, risk and compliance services to the
asset management industry. This investment is via the Hg Saturn 2 fund,
alongside Montagu, a leading private equity firm; Hg will join as a strategic
investor and joint shareholder. Montagu first announced its investment in
Waystone in July 2021. Hg's investment is subject to regulatory approval and
customary closing conditions.
Follow-on investments since the year end
Lyniate
£15.0m invested on behalf of HGT, including £5.0m in co-investment
In January 2022, Hg announced an additional investment into Lyniate, a leader
in healthcare data interoperability. Over 1,300 healthcare organisations
around the globe rely on Lyniate interoperability solutions to connect people
through increased access to data.
Realisations
Over the course of the year, Hg has returned a total of £2.3 billion to its
clients, including £271 million to HGT.
Hg saw some significant exits over the year and we continue to assess further
opportunities to return cash proceeds to our clients, including HGT.
Full exits in the year to 31 December 2021
Allocate
£50.5m returned to HGT
In September 2021, Hg completed the sale of Allocate, a leading workforce and
people management software-as-a-service ('SaaS') provider to healthcare and
government organisations, to RLDatix, the leading global provider of
intelligent patient safety solutions. The sale of this investment represented
an uplift of 48% to the 31 December 2020 valuation of HGT's holding.
Mitratech
£40.7m returned to HGT
In May 2021, Hg completed the sale of Mitratech, a leading provider of legal
and compliance software to Ontario Teachers' Pension Plan Board. Following
completion of the transaction, Hg, the majority investor in Mitratech since
2017, will retain a minority interest.
The sale of the Hg Genesis 7 stake represented an uplift of 40% to the
31 December 2020 valuation of HGT's holding.
BrightPay
£36.6m returned to HGT
In September 2021, Hg announced the sale of BrightPay, a leading provider of
payroll and HR software solutions, headquartered in Ireland. The sale of this
investment represented an uplift of 84% to the 31 December 2020 valuation of
HGT's holding.
Achilles
£23.5m returned to HGT
In October 2021, Hg completed the sale of Achilles, a global leader and
partner of choice for supply chain risk and performance management, to
Bridgepoint, the international private assets fund management group. The sale
of this investment represented an uplift of 33% to the 31 December 2020
valuation of HGT's holding.
APG
£21.5m returned to HGT
In March 2021, Hg completed the sale of APG, one of the UK's largest
specialist insurance intermediaries, to Howden, the international insurance
broking group. Hg partnered with APG in 2015, recognising the business's
best‑in‑class customer success model - a personal, service‑oriented
approach, leading to very high levels of customer satisfaction alongside
strong organic growth. Since then, Hg has worked with management to transform
APG from a predominantly branch‑based, personal lines insurance broker, to a
business with a national footprint across multiple lines of business,
supported by industry‑leading data and analytics capabilities.
TeamSystem
£21.4m returned to HGT
In February 2021, Hg completed the sale of TeamSystem, an Italian provider of
ERP and business management software to SMEs and professionals, from the
Hg Genesis 6 fund.
Trace One
£5.8m returned to HGT
In April 2021, Hg completed the sale of Trace One, the world's largest
collaborative retail business platform for consumer-packaged goods (CPG), to
Symphony Technology Group. Trace One enables customers to create higher
quality, trusted, and compliant own-branded goods faster, delivering benefits
to their consumers and the environment.
The sale of the Hg Mercury 1 stake represented an uplift of 33% to the
31 December 2020 valuation of HGT's holding.
Partial exits in the year to 31 December 2021
Litera
£32.4m returned to HGT
In November 2021, the Hg Genesis team completed the refinancing of Litera, a
leading provider of innovative document technology solutions to legal,
corporate and life sciences organisations.
FE fundinfo
£28.7m returned to HGT
In August 2021, Hg completed the sale of the Hg Mercury 1 Fund investment in
FE fundinfo, the global fund data and analytics business catering to asset
managers and fund distributors. As part of this process, the Hg Genesis 9
Fund, alongside the Hg Mercury 2 Fund, will become the collective lead
investor in FE fundinfo, acquiring the Hg Mercury 1 stake.
Visma
£12.6m returned to HGT
In November 2021, the Saturn team completed the refinancing of Visma, a
leading provider of business-critical software to private and public companies
in Europe.
Evaluate
£11.7m returned to HGT
In September 2021, Hg completed the partial sale of Evaluate, a leading
provider of commercial intelligence and predictive analytics to the
pharmaceutical industry into a strategic combination with MMIT, a US-based
business in complementary adjacencies. The sale of this investment represented
an uplift of 94% to the 31 December 2020 valuation of HGT's holding.
team.blue
£11.4m returned to HGT
In March 2021, the Genesis team completed the refinancing of team.blue, a mass
hosting provider offering web enablement solutions to SMEs across Europe,
headquartered in Belgium. team.blue has now returned 0.6x the original
investment.
To view our press releases, please visit
www.hgcapitaltrust.com/news-and-media/press-releases/pr-2021.aspx
Summary of investment and realisation activity
Investments made during the year
Company Cluster Location Cost
£000
insightsoftware Tax & Accounting North America 55,072
Howden Insurance UK 42,026
Benevity ERP & Payroll North America 31,619
Trackunit Automation & Engineering Scandinavia 26,593
HHAExchange Healthcare IT North America 24,035
MMIT Evaluate Healthcare IT North America 23,367
Serrala Tax & Accounting North America 23,086
Revalize ERP & Payroll North America 18,686
Prophix Tax & Accounting North America 17,139
Riskalyze Capital Markets & Wealth Management IT North America 15,868
DEXT Tax & Accounting UK 15,620
TeamSystem Tax & Accounting Italy 14,250
Geomatikk SME Tech & Services Scandinavia 11,392
AUVESY-MDT Automation & Engineering Germany 8,133
BrightPay ERP & Payroll Ireland 6,532
ProcessMAP Legal & Regulatory Compliance North America 5,249
New investments 338,667
Litera Legal & Regulatory Compliance North America 28,687
FE Fundinfo Capital Markets & Wealth Management IT UK 19,274
Sovos Tax & Accounting North America 10,131
Silverfin Tax & Accounting Benelux 8,173
GGW Insurance Germany 4,870
Visma Tax & Accounting/ERP & Payroll Scandinavia 4,592
Other(1) 9,942
Follow-on investments 85,669
Total investments on behalf of HGT 424,336
( )
(1)Other investments and realisations includes immaterial transactions in
relation to the remaining portfolio.
"As a new portfolio partner to Hg within the last 6 months, I can say that the
Hg value creation team has met or exceeded my expectations for engagement and
collaboration. From technology to operations to finance, HR and GTM, we are
already very engaged on many important initiatives to support our continued
growth and scale."
Greg Strobel, CEO, HHAeXchange
Realisations made during the year
Company Cluster Exit route Proceeds(1) £000
Allocate Healthcare IT Trade Sale 50,498
Mitratech Legal & Regulatory Compliance Secondary sale 40,732
BrightPay ERP & Payroll Secondary sale 36,623
Achilles Legal & Regulatory Compliance Secondary sale 23,486
APG Insurance Trade Sale 21,539
TeamSystem Tax & Accounting Secondary sale 21,373
TraceOne Legal & Regulatory Compliance Secondary sale 5,765
Full realisations 200,016
Litera Legal & Regulatory Compliance Refinancing 32,374
FE fundinfo Capital Markets & Wealth Management IT Secondary sale 28,729
Visma Tax & Accounting/ERP & Payroll Refinancing 12,582
Evaluate Healthcare IT Secondary sale 11,654
team.blue SME Tech & Services Refinancing 11,432
Other(2) 6,814
Partial realisations 103,585
Total proceeds from realisations 303,601
Carried interest paid to the Manager (32,472)
Total proceeds from realisations received by HGT 271,129
( )
(1) Includes gross revenue received of £24.1 million during the year ended
31 December 2021.
(2)Other investments and realisations includes immaterial transactions in
relation to the remaining portfolio.
"The Hg Portfolio team has been fantastic in providing a trusted,
knowledgeable additional set of eyes on a range of business problems in our
business. The insight gained from independent market leading professionals
considering an issue with no vested interest has been extremely valuable."
Hamish Purdey, CEO, FE fundinfo
Hg's outlook
"The overarching driver of Hg's performance - digital transformation of
business activity - continued apace in 2021 and the structural backdrop
remains robust. Coupled with industry's migration to a Software-as-a-Service
model, we remain of the view that we are still early in a generational shift
in market opportunity."
David Toms, Director of Research, Hg
Notwithstanding the geopolitical landscape, the risk of inflation and the
shift to a rising interest rate environment are at the forefront of the minds
both of investors, our portfolio companies, and no doubt their customers.
Labour cost is highly correlated with software and services spend, and thus as
global labour supply tightens and costs rise, the imperative for
digitalisation becomes ever-greater. Investment in productivity enhancement
becomes even more attractive, as it frees up increasingly-valuable staff for
more complex tasks. Consequently, as customers experience the incremental
value of software, they also accept significant price rises - for example,
Microsoft has already announced that March 2022 will see 10-25% price
increases for key bundles of its Office suite(1).
We are also aware that events rarely align perfectly along a timeline, and
there is a risk that a combination of geopolitical events, 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, before the structural factors that drive the need for software
reassert themselves. We are alert to the risks of near-term volatility in the
general economic backdrop, as well as to the structural opportunities this
could create for an investor like Hg with long-term horizons.
Valuation environment
2021 saw a divergence in sentiment in the public markets. For the type of
profitable, well-established software and services businesses in which Hg
typically invests, valuations remained relatively benign; major public
software & services indices with which we are well correlated showed a
very modest increase in multiples over the year. Coupled with strong earnings
growth, Software & Services put in another year of excellent performance,
up 26% across the year, consistent with broader US public markets, and a
little ahead of European public markets.
In contrast, investor views on the more speculative, high growth/unprofitable
software companies underwent a dramatic shift. For such businesses, our
analysis shows that the weighted multiple for this group (measured on an
EV:Sales basis, since there are no material earnings to value) fell nearly 30%
over the course of 2021.
2021 valuations already feel dated given the movements in the first few weeks
of 2022. The H2-21 trend of declining valuations of unprofitable, high-growth
companies accelerated in January 2022 with a further 20% decline, such that
valuations in these companies have, at the time of writing, broadly halved
over the past twelve months. Profitable companies, more reflective of the
businesses in which Hg generally invests, have seen a more moderate impact,
but nonetheless, January was a challenging month and multiples fell c.10%.
Growth in earnings is our most powerful protection against declining
multiples; low to mid-teens organic EBITDA growth offsets two to three turns
of EV:EBITDA multiple contraction. Hg's long experience with B2B software and
services companies, supported by significant investment in our portfolio team,
allows us to accelerate growth, improve margins, and increase the
predictability of the companies in which we invest. For example, in an
inflationary environment, we work with our companies to: improve the value we
add for customers, measure this better through data analytics and capture it
via improved pricing and packaging models. We expect to continue to invest
heavily in our portfolio team both as a crucial driver of our future growth
and to protect our investment performance.
"Growth in earnings is our most powerful protection against declining
multiples; low to mid-teens organic EBITDA growth offsets two to three turns
of EV:EBITDA multiple contraction. Hg's long experience with B2B software and
services companies, supported by significant investment in our portfolio team,
allows us to accelerate growth, improve margins, and increase the
predictability of the companies in which we invest."
Activity levels
Over 2021, Hg has invested more than £5 billion, primarily across 16 new
software and services businesses, including £424 million on behalf of HGT.
This deployment firmly cements Hg's role as one of the largest software groups
in the world, whether measured as an investor, or as an industry participant.
We have commented previously that in any 12‑month period, the investment
teams across Hg would aim to make between 8 and 16 new platform investments in
total across the active Hg Saturn, Hg Genesis and Hg Mercury funds, and
that we would also generally seek to deliver similar numbers of liquidity
events (sales or partial sales of portfolio companies and refinancings) each
year.
Since December 2020, we have added 16 new high quality platform investments to
our portfolio, including insightsoftware, Howden, Benevity, Trackunit,
HHAeXchange, Serrala and MMIT Evaluate. We believe the pace of investment
should continue at broadly this level. From these investments, there is a
further cascade of M&A opportunities, adding to the breadth and depth of
our organic development and catalysing cross sales to existing and acquired
customers. On average, our portfolio companies may acquire two to three
businesses a year, meaning across a portfolio of more than 40 B2B software and
services companies we would typically expect to make around 100 M&A
investments each year (and to diligence and reject many more).
To give a further sense of this scale, Hg's combined portfolio enterprise
value has risen from c. $60 billion in Q1 2020 to over $100 billion today;
and this is despite Hg also sending back a record amount of cash proceeds -
over $11 billion - to our global investor base of pension plans, endowments,
charities, and HGT over the year.
( )
(1
)https://www.microsoft.com/en-us/microsoft-365/blog/2021/08/19/new-pricing-for-microsoft-365/
(https://www.microsoft.com/en-us/microsoft-365/blog/2021/08/19/new-pricing-for-microsoft-365/)
https://www.hgcapitaltrust.com/news-insights/video-library?vid=1539
(https://www.hgcapitaltrust.com/news-insights/video-library?vid=1539)
https://hgcapital.com/insight/bitesize-tech-sector-insight-from-david-toms/
(https://hgcapital.com/insight/bitesize-tech-sector-insight-from-david-toms/)
Overview of the underlying investments
held through HGT's limited partnerships
Investments Fund Sector Location Vintage Residual Total Portfolio Cum.
(in order of value) cost valuation(1) value Value
£000 £000 % %
1 Access HGT 8 ERP & Payroll UK 2018 69,500 309,541 14.7 14.7
2 Visma HGT 7/HGT Saturn/HGT Saturn 2/HGT Tax & Accounting/ERP & Payroll Scandinavia 2020 90,333 227,829 10.8 25.5
3 Litera HGT 8/HGT 9 Legal & Regulatory Compliance N.America 2021 28,999 102,229 4.9 30.4
4 IRIS HGT Saturn Tax & Accounting/ERP & Payroll UK 2018 36,380 91,378 4.4 34.8
5 P&I HGT 7/HGT Saturn/HGT ERP & Payroll Germany 2020 36,333 86,352 4.2 39.0
6 Transporeon HGT 8/HGT ERP & Payroll Germany 2019 41,993 86,075 4.1 43.1
7 Sovos HGT Saturn 2/HGT Tax & Accounting N.America 2020 54,456 78,553 3.7 46.8
8 MeinAuto HGT 8 Automation & Engineering Germany 2017 33,967 72,342 3.4 50.2
9 Howden HGT Saturn 2 Insurance UK 2021 42,026 69,998 3.3 53.5
10 Intelerad HGT 8 Healthcare IT N.America 2020 32,962 69,358 3.3 56.8
11 Septeo HGT 9 Legal & Regulatory Compliance France 2020 38,545 67,266 3.2 60.0
12 insightsoftware HGT Saturn 2/HGT Tax & Accounting N.America 2021 55,072 66,608 3.2 63.2
13 Argus Media HGT Saturn/HGT Capital Mkts & Wealth Mgmt IT UK 2020 30,220 48,435 2.3 65.5
14 FE fundinfo Mercury 2/HGT 9 Capital Mkts & Wealth Mgmt IT UK 2021 22,216 44,489 2.1 67.6
15 Lyniate Mercury 2 Healthcare IT N.America 2018 10,528 42,925 2.0 69.6
16 Azets HGT 7/HGT Tax & Accounting UK 2016 20,966 40,872 1.9 71.5
17 team.blue HGT 8/Mercury 2 SME Tech & Services Benelux 2019 16,567 40,218 1.9 73.4
18 MMIT Evaluate Mercury 2/HGT 9/HGT Healthcare IT UK 2021 24,595 37,705 1.8 75.2
19 Benevity HGT Saturn 2/HGT ERP & Payroll N.America 2021 31,619 36,055 1.7 76.9
20 Caseware HGT 8 Tax & Accounting N.America 2020 28,612 33,956 1.6 78.5
21 Trackunit HGT 9 Automation & Engineering Scandinavia 2021 26,593 32,100 1.5 80.0
22 Medifox Mercury 2/HGT Healthcare IT Germany 2018 11,659 32,067 1.5 81.5
23 Citation HGT 8 SME Tech & Services UK 2020 21,998 31,264 1.5 83.0
24 itm8 HGT 8 SME Tech & Services Scandinavia 2018 16,069 30,134 1.4 84.4
25 Gen II HGT 9 Capital Mkts & Wealth Mgmt IT N.America 2020 19,921 27,352 1.3 85.7
26 Commify Mercury/HGT SME Tech & Services UK 2017 4,080 26,630 1.3 87.0
27 HHAeXchange HGT 9 Healthcare IT N.America 2021 24,035 24,149 1.1 88.1
28 Prophix HGT 9 Tax & Accounting N.America 2021 17,139 23,586 1.1 89.2
29 smartTrade Mercury 2/HGT Capital Mkts & Wealth Mgmt IT France 2020 18,821 22,764 1.1 90.3
30 Serrala HGT 9 Tax & Accounting Germany 2021 23,086 21,785 1.0 91.3
31 Project CH HGT Saturn 2 Tax & Accounting Germany 2021 18,647 20,027 0.9 92.2
32 Revalize HGT 9 ERP & Payroll N.America 2021 18,686 18,906 0.9 93.1
33 GGW Mercury 2/Mercury 3 Insurance Germany 2020 9,144 18,698 0.9 94.0
34 TeamSystem HGT 8 Tax & Accounting/ERP & Payroll Italy 2021 14,250 18,316 0.9 94.9
35 Riskalyze Mercury 3/HGT Capital Mkts & Wealth Mgmt IT N.America 2021 15,868 17,990 0.9 95.8
36 DEXT HGT Saturn/HGT Tax & Accounting UK 2021 15,620 17,757 0.8 96.6
37 Silverfin Mercury 2/HGT Tax & Accounting Benelux 2019 11,387 14,094 0.7 97.3
38 F24 Mercury 2/HGT SME Tech & Services Germany 2020 10,512 13,699 0.6 97.9
39 Geomatikk Mercury 2/HGT SME Tech & Services Scandinavia 2021 11,392 13,466 0.6 98.5
40 AUVESY-MDT Mercury 3 Automation & Engineering Germany 2021 8,133 10,198 0.5 99.0
41 Mitratech HGT 7/HGT Legal & Regulatory Compliance N.America 2017 3,328 8,982 0.4 99.4
42 BrightPay Mercury 3 ERP & Payroll Ireland 2021 6,529 6,737 0.3 99.7
43 ProcessMAP Mercury 3 Legal & Regulatory Compliance N.America 2021 5,249 5,313 0.3 100.0
Non-active investments (2) 9,833 - - 100.0
Total buyout investments (45) 1,087,868 2,108,198 100.0
Currency hedges Various Forward sale of US$ and € - 81 - 100.0
Renewable energy Asper I Renewable energy 5,040 313 - 100.0
Total all investments 1,092,908 2,108,592 100.0
(1)Including accrued income, but before the provision for carried interest of
£171,579,000 and the portfolio level facility of £156,839,000.
Non-Statutory Accounts
The financial information set out below does not constitute the Company's
statutory accounts for the years ended 31 December 2020 and 2021 but is
derived from those accounts. Statutory accounts for 2020 have been delivered
to the Registrar of Companies, and those for 2021 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.com
Financial statements
Income statement
for the year ended 31 December 2021
Notes Revenue return Capital return Total return
2021 2020 2021 2020 2021 2020
£000 £000 £000 £000 £000 £000
Gains on investments and liquidity funds 13 - - 566,130 233,322 566,130 233,322
Losses on priority profit share calls 5(b) - - (7,821) (3,176) (7,821) (3,176)
Net income 4 47,433 24,682 - - 47,433 24,682
Other expenses 6(a) (5,703) (4,846) - - (5,703) (4,846)
Net return before finance costs and taxation 41,730 19,836 558,309 230,146 600,039 249,982
Finance costs 6(b) (5,094) (3,025) - - (5,094) (3,025)
Net return before taxation 36,636 16,811 558,309 230,146 594,945 246,957
Taxation 9 192 (2) - - 192 (2)
Net return after taxation 36,828 16,809 558,309 230,146 595,137 246,955
Basic and diluted return per ordinary share 10(a) 8.49 p 4.11 p 128.70 p 56.30 p 137.19 p 60.41 p
The total return column of this statement represents HGT's income statement.
The supplementary revenue and capital return columns are both prepared under
guidance published by the Association of Investment Companies ('AIC'). All
recognised gains and losses are disclosed in the revenue and capital columns
of the income statement and as a consequence, no statement of comprehensive
income has been presented.
The movements in reserves are set out in note 21 to the financial statements.
All revenue and capital items in the above statement derive from continuing
operations.
No operations were acquired or discontinued during the year.
The following notes form part of these financial statements.
Balance sheet
as at 31 December 2021
Notes 2021 2020
£000 £000
Fixed asset investments
Investments at fair value through profit or loss:
Unquoted investments 12 1,678,008 1,024,116
Total fixed asset investments 1,678,008 1,024,116
Current assets - amounts receivable after one year:
Accrued income on fixed assets 14 102,166 70,953
Current assets - amounts receivable within one year:
Debtors 14 8,090 9,528
Investments at fair value through profit or loss:
Liquidity funds 15 277,049 139,470
Uninvested capital in limited partnerships 12(a) 160 26,471
Cash at bank 16 94,280 21,648
Total current assets 481,745 268,070
Creditors - amounts falling due within one year 17 (2,887) (1,170)
Net current assets 478,858 266,900
Creditors - amounts falling due after one year 18 (151,142) -
Net assets 2,005,724 1,291,016
Capital and reserves:
Called-up share capital 20 11,382 10,400
Share premium account 21 359,971 219,722
Capital redemption reserve 21 1,248 1,248
Capital reserve - unrealised 21 712,188 240,712
Capital reserve - realised 21 885,821 798,988
Revenue reserve 21 35,114 19,946
Total equity shareholders funds 2,005,724 1,291,016
Net asset value per ordinary share 10(b) 440.5 p 310.3 p
Ordinary shares in issue at 31 December 455,279,808 415,999,808
The financial statements of HgCapital Trust plc (registered number 01525583)
on pages 78-101 of the full Annual Report were approved and authorised for
issue by the Board of Directors on 4 March 2022 and signed on its behalf by:
Jim Strang, Chairman
Richard Brooman, Director
The following notes form part of these financial statements.
Statement of cash flows
for the year ended 31 December 2021
Notes 2021 2020
£000 £000
Net cash outflow from operating activities 7 (2,088) (69,041)
Investing activities:
Purchase of fixed asset investments 12 (424,336) (403,215)
Proceeds from the sale of fixed asset investments 279,628 383,025
Proceeds from fund level refinancing 90,180 58,334
Purchase of liquidity funds 15 (195,200) (271,900)
Redemption of liquidity funds 15 57,490 318,149
Net cash (outflow)/inflow from investing activities (192,238) 84,393
Financing activities:
Drawdown of loan facility 18 152,481 -
Servicing of finance (5,094) (3,025)
Equity dividends paid 11 (21,660) (20,399)
Proceeds from issue of shares 141,231 25,162
Net cash inflow from financing activities 266,958 1,738
Increase in cash and cash equivalents in the year 16 72,632 17,090
Cash and cash equivalents at 1 January 16 21,648 4,558
Cash and cash equivalents at 31 December 16 94,280 21,648
The following notes form part of these financial statements.
Statement of changes in equity
for the year ended 31 December 2021
Non-distributable Distributable
Notes Share Share Capital Capital Capital Revenue Total
capital premium redemption reserve - reserve - reserve £000
£000 account reserve unrealised realised £000
£000 £000 £000 £000
At 1 January 2020 10,186 194,774 1,248 264,953 544,601 23,536 1,039,298
Net return after taxation - - - (24,241) 254,387 16,809 246,955
Contributions of equity net of transaction costs 214 24,948 - - - - 25,162
Equity dividends paid 11 - - - - - (20,399) (20,399)
At 31 December 2020 10,400 219,722 1,248 240,712 798,988 19,946 1,291,016
At 1 January 2021 10,400 219,722 1,248 240,712 798,988 19,946 1,291,016
Net return after taxation - - - 471,476 86,833 36,828 595,137
Contributions of equity 982 140,249 - - - - 141,231
net of transaction costs
Equity dividends paid 11 - - - - - (21,660) (21,660)
At 31 December 2021 11,382 359,971 1,248 712,188 885,821 35,114 2,005,724
The following notes form part of these financial statements.
Notes to the financial statements
1. Principal activity
The principal activity of HGT is investment. HGT is an investment company as
defined by section 833 of the Companies Act 2006 and an investment trust under
sections 1158 and 1159 of the Corporation Tax Act 2010 ('CTA 2010') and is
registered as a public company in England and Wales under number 01525583,
with its registered office at 2 More London Riverside, London, SE1 2AP.
2. Basis of preparation
The financial statements have been prepared under the historical cost
convention, except for the revaluation of financial instruments at fair value
as permitted by the Companies Act 2006 and in accordance with applicable UK
law and UK Accounting Standards ('UK GAAP'), including Financial Reporting
Standard 102 - 'The Financial Reporting Standard applicable in the United
Kingdom and Republic of Ireland' ('FRS 102') and with the Statement of
Recommended Practice 'Financial Statements of Investment Trust Companies and
Venture Capital Trusts' ('SORP'), issued in April 2021. All of HGT's
operations are of a continuing nature.
After making enquiries, the Directors have a reasonable expectation that HGT
will have adequate resources to continue in operational existence for the next
12-month period from the date of approval of this report. Accordingly, they
continue to adopt the going-concern basis in preparing these financial
statements.
The same accounting policies, presentation and methods of computation are
followed in these financial statements as were applied in HGT's previous
annual audited report and accounts.
3. Organisational structure and accounting policies
Partnerships where HGT is the sole limited partner
HGT entered into eleven separate partnership agreements with general and
founder partners in May 2003 (subsequently revised in January 2009), January
2009, July 2011, March 2013, December 2016, February 2017, January 2018,
February 2018 and February 2020; at each point, an investment-holding limited
partnership was established to carry on the business of an investor, with HGT
being the sole limited partner in these entities.
The purpose of these partnerships, HGT LP, HGT 6 LP, HGT 7 LP, HGT 8 LP,
HgCapital Mercury D LP, HGT Mercury 2 LP, HGT Saturn LP, HGT Transition
Capital LP, HGT Saturn 2 LP, HGT Genesis 9 LP and HGT Mercury 3 LP (together
the 'primary buyout funds'), is to hold all of HGT's investments in primary
buyouts. Under the partnership agreements, HGT made capital commitments into
the primary buyout funds, with the result that HGT now holds direct
investments in the primary buyout funds and an indirect investment in the
fixed-asset investments which are held by these funds, as it is the sole
limited partner. These direct investments are included under fixed-asset
investments on the balance sheet and in the table of investments on page 91
of the full Annual Report. The underlying investments which are held
indirectly are included in the overview of investments on page 54 of the full
Annual Report.
HGT does not have control over the operating, financial or governance
activities of the limited partnerships in which it is the sole limited
partner. The general partner of these partnerships has the day to day control
and ultimate decision making powers over the activities of these partnerships.
As a result, these limited partnerships are not consolidated in the financial
statements.
Partnerships where HGT is a minority limited partner
In July 2011, HGT acquired a direct secondary investment in
HgCapital 6 E LP ('Hg 6 E LP'), one of the partnerships which comprise
the Hg 6 Fund, in which HGT is now a limited partner pari passu with other
limited partners. This is a direct investment in the Hg 6 E LP Fund.
HGT also entered into partnership agreements with other limited partners, with
the purpose of investing in renewable energy projects, by making capital
commitments in Asper Renewable Power Partners LP ('Asper RPP I LP'). This is a
direct investment in the renewable funds, as shown on the balance sheet and in
the table of investments on page 91 of the full Annual Report.
Priority profit share and other operating expenses, payable by partnerships in
which HGT is a minority limited partner, are recognised as unrealised losses
in the capital return section of the income statement and are not separately
disclosed within other expenses.
Priority profit share and carried interest under the primary buyout limited
partnership agreements
Under the terms of the primary buyout fund limited partnership agreements
('LPAs'), each general partner (see note 5) is entitled to appropriate, as a
first charge on the net income of the funds, an amount equivalent to its
priority profit share ('PPS'). HGT is entitled to net income from the funds,
after payment of the PPS.
In years in which these funds have not yet earned sufficient net income to
satisfy the PPS, the entitlement is carried forward to the following years.
The PPS is payable quarterly in advance, even if insufficient net income has
been earned. Where the cash amount paid exceeds the net income, an
interest-free loan is advanced to the general partner by these primary buyout
funds, which is funded by a capital call from HGT. Such loan is recoverable
from the general partner only by an appropriation of net income until net
income is earned. At the HGT level such a call is expensed in the capital
column as these amounts are not recoverable (see note 5(b)).
Furthermore, under the primary buyout funds' LPAs, each founder partner (see
note 5(c)) is entitled to a carried-interest distribution, once certain
preferred returns are met. The LPAs stipulate that the primary buyout funds'
capital gains or net income, after payment of the carried interest, are
allocated to HGT, when the right to these returns is established.
Accordingly, HGT's entitlement to net income and net capital gains is shown in
the appropriate lines of the income statement. Notes 4, 5 and 10 to the
financial statements disclose the gross income and gross capital gains of the
primary buyout funds and also reflect the proportion of net income and capital
gains in the buyout funds which has been paid to the general partner as its
PPS and to the founder partner as carried interest, where applicable.
The PPS paid from net income is charged to the revenue account in the income
statement, where there is insufficient income PPS is charged as an unrealised
depreciation to the capital return on the income statement.
The carried-interest payments made from net income and capital gains are
charged to the revenue and capital account respectively on the income
statement.
Investment income and interest receivable
As stated above, all income that is recognised by the primary buyout funds,
net of PPS, is allocated to HGT and recognised when the right to this income
is established. Income from Hg 6 E LP and the renewable energy funds would
normally consist of income distributions and these distributions are
recognised as income in the financial statements of HGT when the right to such
distribution is established.
The accounting policies below apply to the recognition of income by the
primary buyout funds, prior to allocation between the Partners:
Interest income on non-equity shares and fixed income securities is recognised
on a time apportionment basis so as to reflect the effective yield when it is
probable that it will be realised. Dividends receivable on unlisted equity
shares where there is no ex-dividend date and on non-equity shares are brought
into account when the right to receive payment is established.
Income from listed equity investments, including taxes deducted at source, is
included in revenue by reference to the date on which the investment is quoted
ex-dividend. Where dividends are received in the form of additional shares
rather than cash dividends, the equivalent of the cash dividend is recognised
as the income in the revenue account and any excess in the value of the shares
received over the amount of the cash dividend is recognised in the capital
reserve - realised.
Expenses
All expenses are accounted for on an accruals basis. All administrative
expenses are charged wholly to the revenue account.
Dividend
Dividend distributions to shareholders are recognised as a liability in the
year that they are approved unconditionally.
Current and other non-current assets
Financial assets and financial liabilities are recognised in HGT's balance
sheet when HGT becomes a party to the contractual provisions of the
instrument. Trade receivables are stated at nominal value. Appropriate
allowances for estimated irrecoverable amounts are recognised in the revenue
return on the income statement.
Cash comprises current accounts held with banks.
Foreign currency
The functional and presentation currency is pounds sterling, reflecting the
economic environment in which HGT predominantly operates. All transactions in
foreign currencies are translated into sterling at the rates of exchange
ruling at the dates of such transactions and the resulting exchange
differences are taken to the capital reserve - realised or revenue, as
appropriate. Foreign currency assets and liabilities at the balance sheet date
are translated into sterling at the exchange rates ruling at that date and the
resulting exchange differences are taken to the capital reserve - unrealised
or revenue as appropriate.
Taxation
Income taxes represent the sum of the tax currently payable, withholding taxes
suffered and deferred tax. Tax is charged or credited in the income statement.
Deferred tax is recognised on all timing differences at the reporting date.
These timing differences arise from the inclusion of income and expenses in
tax assessments in periods different from those in which they are recognised
in the financial statements.
Investments
The principle applied is that investments should be reported at 'fair value',
in accordance with Sections 11 and 12 of FRS 102 and the International Private
Equity and Venture Capital ('IPEV') Valuation Guidelines, December 2018
edition alongside the special issued valuation guidance in March 2020. Where
relevant, HGT applies the policies stated below to the investments held by the
primary buyout funds, in order to determine the fair value of its investments
in these limited partnerships.
Purchases of investments are recognised on a trade date basis. Sales of
investments held through the primary buyout funds are recognised at the trade
date of the disposal. Sales from the investments in Hg 6 E LP and the
renewable energy funds would normally consist of capital distributions and
these distributions are recognised as a realisation when the right to such
distribution is established. Proceeds are measured at fair value, which is
regarded as the proceeds of sale less any transaction costs.
Quoted: Quoted investments are held at fair value, which is deemed to be their
bid price.
Unquoted: Unquoted investments are also held at fair value and are valued
using the following guidelines:
(i) the level of maintainable earnings or revenue and an appropriate
earnings or revenue multiple, unless (iv) is required;
(ii) where more appropriate, investments can be valued based on other
methodologies, including using their net assets or discounted cash flows,
rather than on their earnings or revenue; and
(iii) appropriate fair value movements are made against all individual
valuations where necessary to reflect unsatisfactory financial performance or
a fall in comparable ratings.
Limited partnership funds: these are investments that are set up by a manager
in which HGT has a direct investment, but is not the sole limited partner and
does not hold a majority share. These investments are valued at fair value,
based on the Manager's valuation after any adjustment required by the
Directors.
Liquidity funds: these are short-term investments made in a combination of
fixed and floating rate securities and are valued at the current fair value as
determined by the manager of the fund. They can be realised at short notice.
Derivative financial instruments: derivative financial instruments are held at
fair value and are valued using quoted market prices for financial instruments
traded in active markets, or dealer price quotations for financial instruments
that are not actively traded.
Both realised and unrealised gains and losses arising on fixed asset
investments, financial assets and liabilities and derivative financial
instruments, are taken to the capital reserves.
Capital reserves
Capital reserve - realised
The following are accounted for in this reserve:
(i) gains and losses on the realisation of investments;
(ii) attribution of gains to the founder partners for carried interest;
(ii) losses on investments where there is little prospect of realisation or
recovering any value;
(iv) realised exchange differences of a capital nature; and
(v) expenses, together with the related taxation effect, charged to this
reserve in accordance with the above policies.
Capital reserve - unrealised
The following are accounted for in this reserve:
(i) increases and decreases in the valuation of investments held at the
year-end;
(ii) increases and decreases in the valuation of the loans to general
partners; and
(iii) unrealised exchange differences of a capital nature.
Share capital
Ordinary shares issued are recognised based on the proceeds or fair value
received, with the excess of the amount received over their nominal value
being credited to the share premium account. Direct issue costs are deducted
from equity.
Critical accounting estimates and key sources of estimation uncertainty
The preparation of these financial statements requires the use of estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reported year. Although these estimates are based on
management's best knowledge of the amount, event or actions, actual results
may ultimately differ from those estimates.
The estimates and assumptions are reviewed on an on-going basis. Revisions to
accounting estimates are recognised in the period in which the estimate is
revised if the revision affects only that period, or in the period of the
revision and future periods if the revision affects both current and future
periods.
The key accounting estimate is in respect of the determination of the fair
value of financial assets classified as fair value through profit or loss
(FVTPL). The methodology used in determining fair values is disclosed above.
An attribution analysis of movements in the fair value of investments can be
found on page 38 of the full Annual Report and an analysis of the trading
performance and valuation and gearing analysis of the top 20 buyout
investments by value can be found from pages 56 to 75 of the full Annual
Report. A sensitivity analysis to equity price risk can be found in note 19.
4. Income
Revenue return
2021 2020
£000 £000
Total net income comprises:
Interest 44,954 24,682
Dividend 2,479 -
Total net income 47,433 24,682
All income that is recognised by the primary buyout funds, net of PPS, is
allocated to HGT and recognised when the right to this income is established.
This income and PPS is analysed further below.
Revenue return
2021 2020
£000 £000
Income from investments held by the primary buyout funds
Unquoted investment income 52,862 34,725
Dividend Income 2,479 -
Other investment income:
Unquoted investment income 8 -
Liquidity funds income 648 1,335
Total investment income 55,997 36,060
Total other income - 60
Total income 55,997 36,120
Priority profit share charge against income:
Current year - HGT 8 LP (3,946) (5,711)
Current year - HGT Genesis 9 LP (1,440) -
Current year - HGT Saturn LP (1,388) (1,281)
Current year - HGT Mercury 2 LP (1,154) (2,092)
Current year - HGT 7 LP (400) (1,756)
Current year - HgCapital Mercury D LP (154) (371)
Current year - HGT Titan 1 LP (55) -
Current year - HGT LP (27) (40)
Current year - HGT Transition Capital LP - (187)
Current year - HGT 6 LP - -
Current year - HGT Saturn 2 LP - -
Current year - HGT Mercury 3 LP - -
Total priority profit share charge against income (note 5(a)) (8,564) (11,438)
Total net income 47,433 24,682
5. Priority profit share and carried interest
Revenue return
2021 2020
(a) Priority profit share payable to general partners £000 £000
Priority profit share payable:
Current year amount 16,385 14,614
Less: Current year loans advanced to general partners (note 5(b)) (8,153) (3,922)
Add: Prior year loans recovered from general partners (note 5(b)) 332 746
Current year charge against income 8,564 11,438
Total priority profit share charge against income 8,564 11,438
The priority profit share payable on the primary buyout funds rank as a first
appropriation of net income from investments held in these partnerships
respectively and is deducted prior to such income being attributed to HGT in
its capacity as a Limited Partner. The net income of the primary buyout funds
earned during the year, after the deduction of the priority profit share, is
shown on the income statement. Details of these arrangements are disclosed in
the Directors' report on page 114 of the full Annual Report.
The terms of the above priority profit share arrangements during 2021 were:
Primary buyout fund partnership Priority profit share
HGT Genesis 9 LP 1.75% on the fund commitment during the investment period
HGT Mercury 3 LP 1.75% on the fund commitment during the investment period
HGT 8 LP
1.5% of original cost of investments in the fund, less the original cost of
investments which
have been realised or written off
HGT Mercury 2 LP 1.5% of original cost of investments in the fund, less the original cost of
investments which
have been realised or written off
HGT 7 LP 1.5% of original cost of investments in the fund, less the original cost of
investments which have been realised or written off
HgCapital Mercury D LP 1.5% of original cost of investments in the fund, less the original cost of
investments which have been realised or written off
HGT Saturn 2 LP 1.0% on the fund commitment during the investment period
HGT Saturn LP 1.0% on invested capital
HGT LP 1.0% on invested capital excluding co-investment
In addition, priority profit shares are payable on partnerships where HGT is a
minority limited partner invested pari passu with other institutional
investors. These amounts are initially and indirectly funded by HGT through
the amounts invested in these partnerships and these amounts are recognised as
unrealised losses in the capital account in the income statement.
Fund partnership Priority profit share
Asper Renewable Power Partners LP 1.5% of original cost of investments in the fund, less the original cost of
investments that have been realised or written-off.
Capital return
2021 2020
(b) Priority profit share loans to general partners within the underlying £000 £000
limited partnerships
Movement on loans to general partners:
Losses on current-year loans advanced to general partners (8,153) (3,922)
Gains on prior-year loans recovered from general partners 332 746
Total losses on priority profit share loans advanced to general partners (7,821) (3,176)
In years in which the funds described in note 5(a) have not yet earned
sufficient net income to satisfy the priority profit share, the entitlement is
carried forward to the following years. The priority profit share is payable
quarterly in advance, even if insufficient net income has been earned. Where
the cash amount paid exceeds the net income, an interest free loan is advanced
to the general partner by these primary buyout funds, which is funded via a
loan from HGT. Such loan is only recoverable from the general partner by an
appropriation of net income, until sufficient net income is earned, no value
is attributed to this loan and hence an unrealised capital loss is recognised
and reversed if sufficient income is subsequently generated.
Capital return
2021 2020
(c) Carried interest to founder partners £000 £000
Carried interest charge against capital gains:
Current year charge against realised capital gains 32,472 37,204
Current year charge against unrealised capital gains 90,063 23,429
Total carried-interest charge against capital gains 122,535 60,633
The carried interest payable ranks as a first appropriation of capital gains,
after preferred return, on the investments held in the primary buyout funds,
limited partnerships established solely to hold HGT's investments, and is
deducted prior to such gains being paid to HGT in its capacity as a Limited
Partner. The net amount of capital gains of the primary buyout funds during
the year, after the deduction of carried interest, is shown in the income
statement.
The details of the carried interest contracts, disclosed in the Directors'
report on page 114 of the full Annual Report, state that carried interest is
payable once a certain level of repayments have been made to HGT. Based on the
repayments made during 2021, £32,472,000 (2020: £37,204,000) of carried
interest was paid in respect of the current financial year. If the investments
in HGT 7 LP, HGT 8 LP, HGT Saturn LP, HgCapital Mercury D LP and HGT Mercury 2
LP are realised at the current fair value and then distributed to Partners, an
amount of £171,578,957 will be payable to the Founder Partner (2020:
£81,515,738 payable to the Founder Partner) and therefore the Directors have
made a provision for this amount (see note 12). No provision is required in
respect of HGT's investment in the other fund limited partnerships, because
they are still in their investment period.
6. Other expenses
Revenue return
2021 2020
(a) Operating expenses £000 £000
Registrar, management and administration fees 1,544 1,108
Directors remuneration (note 8) 342 292
Legal and other administration costs(1) 3,702 3,340
5,588 4,740
Fees payable to HGT's auditor in relation to HGT:
Audit fees(2) 115 106
Total fees payable to HGT's auditor 115 106
Total other expenses 5,703 4,846
(1)Includes employer's National Insurance contributions of £37,999 (2020:
£34,030).
(2)In addition to the audit fees payable to the auditor in relation to HGT,
audit fees payable to the auditor in respect of the audit of the primary
buyout funds were £93,600 (2020: £69,000) inclusive of VAT.
Revenue return
2021 2020
(b) Finance costs £000 £000
Interest paid 1,677 1,444
Non-utilisation fees and other expenses 2,279 717
Arrangement fees 1,138 864
Total finance costs 5,094 3,025
7. Cash flow from operating activities
Reconciliation of net return before finance costs and taxation 2021 2020
to net cash flow from operating activities
£000 £000
Net return before finance costs and taxation 600,039 249,982
Gains on investments held at fair value and liquidity funds (657,515) (260,351)
Carried interest paid (32,472) (37,204)
Increase in carried interest provision 90,063 23,429
Increase in accrued income from liquidity funds (648) (1,335)
Increase in accrued income and other debtors (29,775) (17,254)
Increase/(decrease) in creditors 1,717 (61)
Decrease/(increase) in uninvested capital 26,311 (26,245)
Taxation received/(paid) 192 (2)
Net cash outflow from operating activities (2,088) (69,041)
8. Directors' remuneration
The aggregate remuneration of the Directors for the year to 31 December 2021
was £341,750 (2020: £291,684). Further information on the Directors'
remuneration is disclosed in the Directors' remuneration report on pages
129-131 of the full Annual Report.
9. Taxation
In the opinion of the Directors, HGT has complied with the requirements of
section 1158 and section 1159 of the CTA 2010 and will, therefore, be exempt
from corporation tax on any capital gains reported in the capital return
during the year. To the extent possible, HGT will elect to designate all of
the proposed dividend (see note 11) as an interest distribution to its
shareholders. This distribution is treated as a tax deduction against taxable
income in the revenue return and results in a reduction of corporation tax
being payable by HGT at 31 December 2021.
The rate of corporation tax in the UK for a company was 19% during the year
(2020: tax rate of 19%). However, the tax charge in the current and previous
year was lower than the standard and effective tax rate, owing largely to the
reduction in corporation tax from the interest distribution noted above. The
effect of this and other items affecting the tax charge is shown in note 9(b)
below.
Revenue return
2021 2020
(a) Analysis of charge in the year £000 £000
Current tax:
UK corporation tax 6,583 2,798
Income streaming relief (6,476) (2,802)
Prior year adjustment (192) 6
Tax losses brought forward (107) -
Current revenue tax (credit)/charge for the year (192) 2
Deferred tax:
Reversal of timing differences - -
Total deferred tax charge for the year (note 9(c)) - -
Total taxation (credit)/charge (192) 2
Revenue return
2021 2020
(b) Factors affecting tax (credit)/charge for the year £000 £000
Net revenue return before taxation 36,636 16,811
UK corporation tax charge at 19% thereon (2020: 19%) 6,961 3,194
Effects of:
Tax relief from interest distribution (6,476) (2,802)
Tax relief from expenses allocated to capital (378) (396)
Prior year tax adjustment (192) 6
Tax losses brought forward (107) -
Total differences (7,153) (3,192)
Total taxation (credit)/charge (192) 2
Revenue return
2021 2020
(c) Deferred tax £000 £000
Deferred tax:
Movement in taxable income not recognised in revenue return - -
Total deferred tax charge for the year (note 9(a)) - -
Deferred tax recoverable:
Recoverable deferred tax at 31 December - -
Deferred tax charge for the year - -
Recoverable deferred tax at end of year - -
Deferred tax assets of £nil were recognised at 31 December 2021 (2020: £nil
at a 19% tax rate).
10. Return and net asset value per Ordinary share
Revenue return Capital return
(a) Basic and diluted return per ordinary share 2021 2020 2021 2020
Amount (£000):
Net return after taxation 36,828 16,809 558,309 230,146
Weighted average number of ordinary shares (000):
Weighted average number of ordinary shares in issue 433,799 408,765 433,799 408,765
Basic and diluted return per ordinary share (pence) 8.49 4.11 128.70 56.30
The basic and diluted EPS are the same as the Company does not have dilutive
financial instruments.
Capital return
(b) Net asset value per ordinary share 2021 2020
Amount (£000):
Net assets 2,005,724 1,291,016
Number of ordinary shares (000):
Number of ordinary shares in issue 455,280 416,000
Net asset value per ordinary share (pence) 440.5 310.3
11. Dividends on ordinary shares
2021 2020
Record date Payment date £000 £000
Interim Dividend of 2.0p for the year ended 31 December 2021 16 September 2021 22 October 2021 8,832 -
Final Dividend of 3.0p for the year ended 31 December 2020 29 April 2021 27 May 2021 12,828 -
Interim Dividend of 2.0p for the year ended 31 December 2020 24 September 2020 28 October 2020 - 8,176
Final Dividend of 3.0p for the year ended 31 December 2019 19 March 2020 15 May 2020 - 12,223
Total equity dividends paid 21,660 20,399
The proposed final dividend of 5.0 pence per ordinary share for the year ended
31 December 2021 is subject to approval by the shareholders at the annual
general meeting and has not been included as a liability in these financial
statements. The total dividends payable in respect of the financial year,
which form the basis of the retention test as set out in Section 1159 of the
CTA 2010, are set out below:
2021 2020
£000 £000
Revenue available for distribution by way of dividend for the year 36,828 16,809
Interim dividend of 2.0p for the year ended 31 December 2021 (paid on 22 (8,832) (12,223)
October 2021)
Proposed final dividend of 5.0p for the year ended 31 December 2021 (based on (22,764) (12,480)
455,279,808 ordinary shares in issue at 31 December 2021)
Undistributed revenue/(distributions in excess of revenue) for Section 1159 5,232 (7,894)
purposes*
*Distributions in excess of revenue are financed by the revenue reserve
12. Fixed asset investments
2021 2020
£000 £000
Investments held at fair value through profit and loss:
Unquoted investments held in HGT 8 LP 697,719 431,092
Unquoted investments held in HGT Saturn 2 LP 336,397 112,992
Unquoted investments held in HGT Genesis 9 LP 281,995 57,734
Unquoted investments held in HGT Saturn LP 265,810 208,138
Unquoted investments held in HGT Mercury 2 LP 160,471 94,659
Unquoted investments held in HGT LP 141,477 71,108
Unquoted investments held in HGT 7 LP 74,914 103,527
Unquoted investments held in HGT Mercury 3 LP 34,621 -
Unquoted investments held in HgCapital Mercury D LP 12,711 30,702
Other unquoted investments held by the company 311 2,239
Unquoted investments held in HGT Transition Capital LP - 29,126
Total fixed asset investments gross of carried interest provision 2,006,426 1,165,403
Carried interest provision (note 5(c)) (171,579) (81,516)
Fund level facilities* (156,839) (59,771)
Total fixed asset investments 1,678,008 1,024,116
Total fixed asset investments consist of:
Fund limited partnerships 1,678,008 1,024,116
( )
(*)Loan facility in the underlying funds that resulted in proceeds received by
HGT.
2021 2020
£000 £000
Opening valuation as at 1 January 1,024,116 788,013
Opening unrealised appreciation - investments (339,497) (329,086)
Opening carried interest provision 81,516 58,087
Opening advanced proceeds 59,771 -
Opening book cost as at 1 January 825,906 517,014
Movements in the year:
Additions at cost 424,336 403,215
Disposals - proceeds (279,628) (383,025)
- realised gains on sales 122,294 288,702
Closing book cost of investments 1,092,908 825,906
Add: closing unrealised appreciation - investments 913,518 339,497
Less: closing carried interest provision (171,579) (81,516)
Less: fund level facilities (156,839) (59,771)
Closing valuation of investments at 31 December 1,678,008 1,024,116
The investments above include investments in companies that are indirectly
held by HGT through its investment in the primary buyout funds as set out in
note 3 on page 83 in the full Annual Report, and investments in fund limited
partnerships in Hg 6 E LP and Asper Renewable Power Partners LP. The net
assets attributable to partners at 31 December 2020, being the date of the
last audited balance sheet, of these primary buyout funds were £71,108,224
(HGT LP), £24,085,862 (HGT 6 LP), £103,527,054 (HGT 7 LP), £30,701,781
(HgCapital Mercury D LP), £431,091,918 (HGT 8 LP), £94,659,381 (HGT
Mercury 2 LP), £208,138,396 (HGT Saturn LP), £29,126,013 (HGT Transition
Capital LP), £112,991,806 (HGT Saturn 2 LP) and £57,733,503
(HGT Genesis 9 LP).
a) Uninvested capital in limited partnerships
Uninvested capital in the limited partnerships relates to cash held in the
underlying limited partnerships as a result of timing differences before an
investment or after a realisation. Cash held at the fund level at the 31
December 2021 was £0.2 million (2020: £26.5 million).
13. Gains on investments and liquidity funds
Capital return
2021 2020
£000 £000
Realised:
Realised gains/(losses) - fixed asset investments 122,294 288,702
- liquidity funds 236 2,117
- foreign exchange losses (1,234) -
- aborted deal fees (1,991) 548
- loan facility - 224
119,305 291,591
Carried interest charge against realised capital gains (note 5(c)) (32,472) (37,204)
Net realised gains 86,833 254,387
Unrealised:
Unrealised gains/(losses) - fixed asset investments 574,021 10,411
- foreign exchange on investments 1,861 (2,288)
- liquidity funds (1,015) (2,238)
- aborted deal fees 42 (2,084)
- foreign exchange on loan facility 1,339 -
576,248 3,801
Carried interest charge against unrealised capital gains (note 5(c)) (90,063) (23,429)
Fund level facilities¹ (6,888) (1,437)
Net unrealised gains / (losses) 479,297 (21,065)
Total gains 566,130 233,322
( )
(1)Loan facility in the underlying funds that resulted in proceeds received by
HGT.
Page 38 of the Manager's Review in the full Annual Report contains an analysis
of all material realised and unrealised movements in value of individual
investments held as fixed asset investments, in accordance with paragraph 28
and 29 of the 'SORP'.
14. Debtors and accrued income
2021 2020
£000 £000
Amounts receivable after one year:
Accrued income on fixed assets 102,166 70,953
Amounts receivable within one year:
Prepayments and other debtors 8,090 9,528
Total amounts receivable within one year 8,090 9,528
Total debtors 110,256 80,481
The Directors consider that the carrying amount of debtors approximates their
fair value.
15. Liquidity funds
2021 2020
£000 £000
Investments held at fair value through profit or loss:
Opening valuation 139,470 184,505
Purchases at cost 195,200 271,900
Redemptions (57,490) (318,149)
Movement in unrealised capital losses (1,015) (2,238)
Movement in accrued income 648 1,335
Realised capital gains 236 2,117
Closing valuation 277,049 139,470
16. Movement in net debt
2021 2020
£000 £000
Analysis and reconciliation of net funds:
Net funds at 1 January 21,648 4,558
Change in cash 72,632 17,090
Change in debt due after one year (152,481) (224)
Other non-cash changes 1,339 224
Net (debt)/funds at 31 December (56,862) 21,648
Net funds comprise:
Cash 94,280 21,648
Debt due after one year (151,142) -
17. Creditors - amounts falling due within one year
2021 2020
£000 £000
Accruals 2,887 1,170
Total creditors 2,887 1,170
The Directors consider that the carrying amount of creditors approximates
their fair value.
18. Bank facility
2021 2020
£000 £000
Opening valuation - -
Draw on loan facility 152,481 80,271
Repayment of loan facility - (80,047)
Unrealised gains (1,339) -
Realised gains - (224)
Total loan facility 151,142 -
In June 2019 HGT entered into an £80 million facility. In October 2020 this
facility was repaid in full and a revised facility agreed for £200 million.
In December 2021 the facility was increased to £250 million. Under the
facility agreement, HGT is liable to pay interest on any drawn amount at LIBOR
plus a margin of 3.25%. A commitment fee of 1.15% is liable on any undrawn
commitment. The term of this facility is four years. The facility was 60%
drawn as at the end of the year.
19. Financial risk
The following disclosures relating to the risks faced by HGT are provided in
accordance with sections 11 and 12 of FRS 102. The reference to investments in
this note is in relation to HGT's direct investments in Asper RPP I LP, Hg 6 E
LP and the underlying investments in HGT LP, HGT 6 LP, HGT 7 LP, HGT 8 LP,
HgCapital Mercury D LP,HGT Mercury 2 LP, HGT Saturn LP, HGT Saturn 2 LP, HGT
Genesis 9 LP and HGT Transition Capital LP as described in note 3 on page 83
of the full Annual Report.
Financial instruments and risk profile
HGT's investment objective is to achieve long-term capital appreciation by
indirectly investing in unquoted companies. It does this through its
investments in fund partnerships, mostly in the UK and Europe. Additionally,
HGT holds UK Government securities, cash, liquidity funds and items such as
debtors and creditors arising directly from its operations. In pursuing its
investment objective, HGT is exposed to a variety of risks that could result
in either a reduction of HGT's net assets or a reduction in the profits
available for distribution by way of dividends. Valuation risk, market risk
(comprising currency risk and interest rate risk), liquidity risk and credit
risk, and the Directors' approach to the management of them, are described
below. The Board and Hg coordinate HGT's risk management. The objectives,
policies and processes for managing the risks, and the methods used to manage
the risks, that are set out below, have not changed from the previous
accounting period.
Valuation risk
HGT's exposure to valuation risk arises mainly from movements in the value of
the underlying investments (held through fund partnerships), the majority of
which are unquoted. A breakdown of HGT's portfolio is given on page 43 of the
full Annual Report and a breakdown of the most significant underlying
investments is given on page 54. In accordance with HGT's accounting policies,
the investments in fund limited partnerships are valued by reference to their
underlying unquoted investments, which are valued by the Directors following
the IPEV Valuation Guidelines. Page 41 of the full Annual Report includes
details of the most significant assumptions included in the valuations. HGT
does not hedge against movements in the value of these investments, apart from
foreign exchange movements as explained below, though the borrowing arranged
to fund these investments is normally denominated in the currency in which the
business is operating and valued (see page 98 of the full Annual Report). HGT
has exposure to interest rate movements, through bank deposits and liquidity
funds.
In the opinion of the Directors, the diversified nature of HGT's investments
significantly reduces the risks of investing in unquoted companies.
FRS 102 requires HGT to classify fair value measurements using a fair value
hierarchy that reflects the significance of the inputs used in making the
measurements. The fair value hierarchy has the following levels:
• Quoted prices (unadjusted) in active markets for identical assets or
liabilities (level 1).
• Inputs other than quoted prices included within level 1 that are
observable for the asset or liability, either directly (that is, as prices) or
indirectly (that is, derived from prices) (level 2).
• Inputs for the asset or liability that are not based on observable
market data (that is, unobservable inputs) (level 3).
The level in the fair value hierarchy, within which the fair value measurement
is categorised in its entirety, is determined on the basis of the lowest level
input that is significant to the fair value measurement in its entirety. For
this purpose, the significance of an input is assessed against the fair value
measurement in its entirety. If a fair value measurement uses observable
inputs that require significant adjustment based on unobservable inputs, that
is a level 3 measurement. Assessing the significance of a particular input to
the fair value measurement in its entirety requires judgement, considering
factors specific to the asset or liability.
The determination of what constitutes an 'observable' input requires
significant judgement by the Board. The Board considers observable data
relating to investments actively traded in organised financial markets, in
which case fair value is generally determined by reference to stock exchange
quoted market bid prices at the close of business on the balance sheet date,
without adjustment for transaction costs necessary to realise the asset.
The following table analyses, within the fair value hierarchy, the fund's
financial assets (by class) measured at fair value at 31 December 2021.
Level 1 Level 2 Level 3 Total
£000 £000 £000 £000
Investments held at fair value through profit and loss:
Unquoted investments
- Investment in HGT 8 LP - - 697,719 697,719
- Investment in HGT Saturn 2 LP - - 336,397 336,397
- Investment in HGT Genesis 9 LP - - 281,995 281,995
- Investment in HGT Saturn LP - - 265,810 265,810
- Investment in HGT Mercury 2 LP - - 160,471 160,471
- Investment in HGT LP - - 141,477 141,477
- Investment in HGT 7 LP - - 74,914 74,914
- Investment in HGT Mercury 3 LP - - 34,621 34,621
- Investment in Hg Mercury D LP - - 12,711 12,711
- Investment in Asper RPP I LP - - 311 311
- Liquidity funds - 277,049 - 277,049
- Carried interest provision - - (171,579) (171,579)
- Fund level refinancing - - (156,839) (156,839)
- Uninvested capital in limited partnerships - - 160 160
As at 31 December 2021 - 277,049 1,678,168 1,955,217
Level 1 Level 2 Level 3 Total
£000 £000 £000 £000
Investments held at fair value through profit and loss:
Unquoted investments
- Investment in HGT 8 LP - - 431,092 431,092
- Investment in HGT Saturn LP - - 208,138 208,138
- Investment in HGT Saturn 2 LP - - 112,992 112,992
- Investment in HGT Saturn LP - - 103,527 103,527
- Investment in HGT Mercury 2 LP - - 94,659 94,659
- Investment in HGT LP - - 71,108 71,108
- Investment in HGT Genesis 9 LP - - 57,734 57,734
- Investment in Hg Mercury D LP - - 30,702 30,702
- Investment in HGT Transition Capital LP - - 29,126 29,126
- Investment in HGT 6 LP - - 24,086 24,086
- Investment in HG6 E LP - - 2,239 2,239
- Liquidity funds - 139,470 - 139,470
- Carried interest provision - - (81,516) (81,516)
- Uninvested capital in limited partnerships - - 26,471 26,471
As at 31 December 2020 - 139,470 1,050,587 1,190,057
Investments whose values are based on quoted market prices in active markets,
and therefore classified within level 1, include government securities and
actively traded listed equities. HGT does not adjust the quoted bid price of
these investments.
Financial instruments that trade in markets that are not considered to be
active, but are valued based on quoted market prices, dealer quotations or
alternative pricing sources supported by observable inputs, are classified
within level 2. As level 2 investments include positions that are not traded
in active markets and/or are subject to transfer restrictions, valuations may
be adjusted to reflect illiquidity and/or non-transferability, which are
generally based on available market information.
Investments classified within level 3 have significant unobservable inputs.
Level 3 instruments include private equity and corporate debt securities. As
observable prices are not available for these securities, the Board has used
valuation techniques to derive the fair value. In respect of unquoted
instruments, or where the market for a financial instrument is not active,
fair value is established by using recognised valuation methodologies, in
accordance with IPEV Valuation Guidelines. Fair value is the amount for which
an asset could be exchanged between knowledgeable, willing parties in an arm's
length transaction.
There were no transfers of assets from level 1 to level 2 or 3, level 2 to
level 1 or 3 and level 3 to level 1 or 2.
The following table presents the movement in level 3 investments for the year
ended 31 December 2021 by class of financial instrument.
Total investments in limited partnerships 2021 2020
£000 £000
Unquoted investments:
Opening balance 1,024,116 788,013
Purchases 424,336 403,215
Realisations at 31 December 2020 valuation (198,150) 94,046
Unrealised appreciation of fixed asset investments 614,837 (177,958)
Movement in net carried interest provision (90,063) (23,429)
Fund level refinancing (97,068) (59,771)
Closing unrealised valuation of level 3 investments 1,678,008 1,024,116
Equity price risk
Equity price risk is the risk of a fall in the fair value of HGT's ownership
interests (comprising equities and shareholder loans) held by HGT indirectly
through its direct investments in fund limited partnerships. The Board
revalues each investment on a quarterly basis. The Board manages the risks
inherent in HGT's investment activities by ensuring full and timely access to
relevant information from Hg. The Board meets regularly and at each meeting
reviews the trading performance of the principal underlying investments. If
there appears to the Board to be a fair value movement in value between
regular valuations, it can revalue the investment. The Board also monitors
Hg's compliance with HGT's investment objective and investment policy.
For unquoted equity investments, the market risk variable is deemed to be the
multiples applied to a maintainable earnings figure to calculate the
individual investment valuations within each of the primary buyout funds;
borrowing is then deducted to arrive at a valuation of the net equity held by
HGT. These multiples are largely based on the historic trading multiples of
comparable businesses and therefore there is a potential impact on the
valuation of unquoted investments of a fall in global equity markets. Hg's
best estimate of the effect on the net assets of HGT due to a 1x reduction in
the multiples applied to calculate the enterprise value of all unquoted
investments, with all other variables held constant, is as follows:
2021 2020
£000 NAV per £000 NAV per
ordinary ordinary
share share
Pence Pence
Sensitivity to equity price risk:
1x reduction in EV to EBITDA multiple applied to unquoted investments
Change in the value of unquoted investments (129,215) (28.4) (59,864) (14.7)
A fall in the value of unquoted investments could be mitigated to some degree
by a reduction in the provision for carried interest (£172 million at 31
December 2021), but only in funds where an adjustment for carried interest is
required (Hg Genesis 6, Hg Genesis 7, Mercury 1, Hg Genesis 8, Hg Saturn and
Mercury 2, see note 5(c) or on page 87 of the full Annual Report). Hg's best
estimate of the impact on the carried interest provision of the above change
in value of unquoted investments is a reduction in the provision of
£14,336,000, 3.1 pence per ordinary share (2020: £17,715,000, 4.3 pence per
ordinary share). There are likely to be other correlations (either positive or
negative) between the assumptions and other factors. Other inputs, such as the
earnings of individual investments within the primary buyout funds are likely
to have a significant impact on the value of unquoted investments. See page 40
of the Manager's report in the full Annual Report for an analysis of the
portfolio trading performance as at 31 December 2021. The Board regularly
stress tests the NAV.
Credit risk
Credit risk is the risk of financial loss in the event that any of HGT's
market counterparties fail to fulfil their contractual obligations to HGT.
HGT's financial assets (excluding fixed asset investments) that are subject to
credit risk, were neither impaired nor overdue at the year-end. HGT's cash
balances were held with the Royal Bank of Scotland International and amounts
not required for day-to-day use were invested in liquidity funds managed by
Royal London Asset Management which are rated AAA by Fitch. Foreign exchange
forward contracts and options are held with counterparties which have credit
ratings which the Board considers to be adequate. The Board regularly monitors
the credit quality and financial position of these market counterparties. The
credit quality of the above mentioned financial assets was deemed
satisfactory.
Market risk
The fair value of future cash flows of a financial instrument held by HGT may
fluctuate due to changes in market prices of comparable businesses. This
market risk may comprise: currency risk (see below), interest rate risk and/or
equity price risk (see above). The Board of Directors reviews and agrees
policies for managing these risks. Hg assesses the exposure to market risk
when making each investment decision, and monitors the overall level of market
risk across all of HGT's investments on an ongoing basis.
Currency risk and sensitivity
HGT is exposed to currency risk as a result of investing in fund partnerships
which invest in companies that operate and are therefore valued in currencies
other than sterling. The value of these assets in sterling, being HGT's
functional currency, can be significantly influenced by movements in foreign
exchange rates. Borrowing raised to fund each acquisition in such companies is
normally denominated in the currency in which the business is operating and
valued, thus limiting HGT's exposure to the value of its investments, rather
than the gross enterprise value. From time to time, HGT is partially hedged
against movements in the value of foreign currency against sterling where a
movement in exchange rate could affect the value of an investment, as
explained below. Hg monitors HGT's exposure to foreign currencies and reports
to the Board on a regular basis. The following table illustrates the
sensitivity of the revenue and capital return for the year in relation to
HGT's year-end financial exposure to movements in foreign exchange rates
against sterling. The rates represent the range of movements against sterling
over the current year for the currencies listed, and are considered the best
estimate for movements looking forward.
In the opinion of the Directors, the sensitivity analysis below may not be
representative of the year as a whole, since the level of exposure changes as
HGT's holdings change through the purchase and realisation of investments to
meet HGT's objectives.
2021 2020
Revenue return Capital return Revenue return Capital return
NAV per ordinary share NAV per ordinary share NAV per ordinary share NAV per ordinary share
£000 Pence £000 Pence £000 Pence £000 Pence
Highest value against sterling during the year:
Danish krone (1) - (15) - 119 0.3 793 1.9
Euro (15) - (197) (0.4) 1,375 3.3 16,436 39.5
New Zealand dollar - - - - - - 17 -
Norwegian krone - - (7,817) (17.2) - - 2,262 5.4
US dollar (147) (0.3) (21,296) (46.8) 356 0.9 31,134 74.8
CAD dollar (93) (0.2) (6,075) (13.3) 6 - 3,293 7.9
(256) (0.5) (35,400) (77.7) 1,856 4.5 53,935 129.5
Lowest value against sterling during the year:
Danish krone 352 0.8 4,526 9.9 (213) (0.5) (1,420) (3.4)
Euro 2,934 6.4 39,735 87.3 (2,165) (5.2) (25,874) (62.2)
New Zealand dollar - - - - - - (90) (0.2)
Norwegian krone - - 9,653 21.2 - - (21,219) (51.0)
US dollar 79 0.2 11,546 25.4 - - 6 -
CAD dollar 56 0.1 3,652 8.0 (3) - (1,758) (4.2)
3,421 7.5 69,112 151.8 (2,381) (5.7) (50,355) (121.0)
At 31 December 2021, the following rates were applied to convert foreign
denominated assets into sterling: Danish krone (8.8585); euro (1.1910); New
Zealand dollar (1.9783); Norwegian krone (11.9440); US dollar (1.3545) and CAD
dollar (1.7109).
Hedging
At times, HGT uses derivative financial instruments such as forward foreign
currency contracts and option contracts to manage the currency risks
associated with its underlying investment activities. The contracts entered
into by HGT are denominated in the foreign currency of the geographic areas in
which HGT has significant exposure against its reporting currency. The
contracts are used for hedging and the fair values thereof are recorded in the
balance sheet as investments held at fair value. Unrealised gains and losses
are taken to capital reserves. At the balance sheet date, there were no
outstanding derivative financial instruments (2020: nil).
HGT does not trade in derivatives but may hold them from time to time to hedge
specific exposures with maturities designed to match the exposures they are
hedging. It is the intention to hold both the financial investments giving
rise to the exposure and the derivatives hedging them until maturity and
therefore no net gain or loss is expected to be realised.
Derivatives are held at fair value, which represents the replacement cost of
the instruments at the balance sheet date. Movements in the fair value of
derivatives are included in the income statement. HGT does not adopt hedge
accounting in the financial statements.
Interest rate risk and sensitivity
HGT has exposure to interest rate movements as this may affect the fair value
of funds awaiting investment, interest receivable on liquid assets and managed
liquidity funds, and interest payable on borrowings. HGT has little immediate
direct exposure to interest rates on its fixed assets, as the majority of the
underlying investments are fixed rate loans or equity shares that do not pay
interest. Therefore, HGT's revenue return is not materially affected by
changes in interest rates.
However, funds awaiting investment have been invested in managed liquidity
funds and, as stated above, their valuation is affected by movements in
interest rates. The sensitivity of the capital return of HGT to movements in
interest rates has been based on the UK base rate. With all other variables
constant, a 0.25% decrease in the UK base rate should increase the capital
return in a full year by about £690,000 (2020: £360,000) with a
corresponding decrease if the UK base rate were to increase by 0.25%. In the
opinion of the Directors, the above sensitivity analyses may not be
representative of the year as a whole, since the level of exposure changes as
investments are made and realised throughout the year.
Liquidity risk
Investments in unquoted companies, which form the majority of HGT's
investments, may not be as readily realisable as investments in quoted
companies, which might result in HGT having difficulty in meeting its
obligations. Liquidity risk is currently not significant as 19% of HGT's net
assets at the year-end are liquid resources and, in addition, HGT has a £250
million multi-currency bank facility which had £99 million undrawn capacity
at the year end . The Board gives guidance to Hg as to the maximum amount of
HGT's resources that should be invested in any one company. For further
details refer to HGT's Investment Policy on page 13 of the full Annual Report.
Currency and interest rate exposure
HGT's financial assets that are subject to currency and interest rate risk are
analysed below:
2021 2020
Fixed and floating rate Non Total Total Fixed and floating rate Non Total Total
interest- interest-
bearing bearing
£000 £000 £000 % £000 £000 £000 %
Sterling 371,489 373,425 744,914 34.2 187,589 375,482 563,071 41.4
Euro - 537,380 537,380 24.7 - 386,450 386,450 28.4
Norwegian krone - 213,002 213,002 9.8 - 144,646 144,646 10.6
US dollar - 454,933 454,933 20.9 - 166,018 166,018 12.2
Danish krone - 61,627 61,627 2.8 - 21,525 21,525 1.6
New Zealand dollar - - - - - 948 948 0.1
CAD dollar - 165,447 165,447 7.6 - 77,678 77,678 5.7
Total 371,489 1,805,814 2,177,303 100.0 187,589 1,172,747 1,360,336 100.0
Short-term debtors and creditors, which are excluded, are mostly denominated
in sterling, the functional currency of HGT. The fixed and floating rate
assets consisted of cash and liquidity funds, of which the underlying
investments are a combination of fixed and floating rate. The
non-interest-bearing assets represent the investments held in fund limited
partnerships, net of the provision for carried interest.
Capital management policies and procedures
HGT's capital management objectives are to ensure that it will be able to
finance its business as a going concern and to maximise the revenue and
capital return to its equity shareholders.
HGT's capital at 31 December 2021 comprised:
2021 2020
£000 £000
Equity:
Equity share capital 11,382 10,400
Share premium 359,971 219,722
Capital redemption reserve 1,248 1,248
Retained earnings and other reserves 1,633,123 1,059,646
Total capital 2,005,724 1,291,016
With the assistance of Hg, the Board monitors and reviews the broad structure
of HGT's capital on an ongoing basis. This review covers:
• the projected level of liquid funds (including access to bank
facilities);
• the desirability of buying back equity shares, either for cancellation
or to hold in treasury, balancing the effect (if any) this may have on the
discount at which shares in HGT are trading against the advantages of
retaining cash for investment;
• the opportunity to raise funds by an issue of equity shares; and
• the extent to which revenue in excess of that which is required to be
distributed should be retained, while maintaining its status under Section
1158 of the CTA 2010.
HGT's objectives, policies and processes for managing capital are unchanged
from the preceding accounting period.
20. Called-up share capital
2021 2020
No. 000 £000 No. 000 £000
Ordinary shares of 2.5p each:
Allotted, called up and fully paid:
At 1 January 416,000 10,400 407,425 10,186
Sub-division of ordinary shares - - - -
Issues of ordinary shares 39,280 982 8,575 214
At 31 December 455,280 11,382 416,000 10,400
Total called-up share capital 455,280 11,382 416,000 10,400
While HGT no longer has an authorised share capital, the Directors will still
be limited as to the number of shares they can at any time allot, as the
Companies Act 2006 requires that Directors seek authority from shareholders
for the allotment of new shares. Share issue costs incurred during the year
were £1,426,573 (2020: £254,167). Total proceeds received from the issuance
of shares during the year were £141,230,750 (2020: £25,162,000).
21. Share premium account and reserves
Share Capital redemption reserve Capital Capital Revenue reserve
premium reserve reserve
account unrealised realised
£000 £000 £000 £000 £000
As at 1 January 2021 219,722 1,248 240,712 798,988 19,946
Issues of ordinary shares 140,249 - - - -
Transfer on disposal of investments - - (40,816) 40,816 -
(Losses)/gains on liquidity funds - - (1,015) 236 -
(Losses)/gains on aborted deal fees - - 42 (1,991) -
Foreign exchange gain on loan facility - - 1,339 - -
Net movement on sale of fixed asset investments - - - 81,478 -
Net movement in unrealised appreciation of fixed asset investments - - 614,837 - -
Foreign exchange gain/(loss) on fixed asset investments - - 1,861 - -
Foreign exchange gain/(loss) on portfolio facilities - - (6,888) - -
Foreign exchange gain/(loss) on cash balances - - - (1,234) -
Dividends paid - - - - (21,660)
Net revenue return - - - - 36,828
Net loans recovered from General Partners - - (7,821) - -
Carried interest - - (90,063) (32,472) -
As at 31 December 2021 359,971 1,248 712,188 885,821 35,114
22. Commitment in fund partnerships and contingent liabilities
Fund Original (1) Outstanding at 31 Dec
commitment
2021 2020
£000 £000 £000
HGT Saturn 3 LP 627,538 (2) 627,538 -
HGT LP 92,285 (3) 92,285 1,300
HGT Saturn 2 LP 295,312 (4) 67,835 200,605
HGT Genesis 9 LP 302,267 (5) 66,162 263,218
HGT Mercury 3 LP 96,558 (6) 64,033 102,936
HGT 8 LP 350,000 51,499 9,700
HGT Saturn LP 150,000 15,944 7,900
HgCapital Mercury D LP 60,000 (7) 3,265 3,300
HGT Mercury 2 LP 80,000 1,849 4,700
HGT 7 LP 200,000 (7) 992 1,200
Asper RPP I LP 18,170 (8) 581 (9) 600
HGT Transition Capital LP 75,000 - 49,600
HGT 6 LP 285,029 (7) - 2,300
Hg 6 E LP 15,000 (7) - 100
Total outstanding commitments 991,983 647,459
( )
(1 )HGT has the benefit of an opt-out provision in connection with its
commitments to invest alongside Hg Genesis 8, Hg Mercury 2, Hg Saturn,
Transition Capital, Hg Saturn 2, Hg Genesis 9, Hg Mercury 3 and Hg
Saturn 3 allowing it to opt out of its obligation to fund draw-downs under its
commitments, without penalty, where certain conditions exist.
(2 )Sterling equivalent of $850,000,000.
(3 )Sterling equivalent of $125,000,000 of junior debt.
(4 )Sterling equivalent of $400,000,000.
(5 )Sterling equivalent of €360,000,000.
(6 )Sterling equivalent of €360,000,000.
(7 )5.5% of the original £300 million to the HgCapital 6 Fund, 7.6% of the
£60 million to the Mercury 1 Fund and 12.4% of the original £200 million
to the HgCapital 7 Fund have subsequently been cancelled, as the Manager
deemed that it was unlikely to be required.
(8 )Sterling equivalent of €21,640,000.
(9 )Sterling equivalent of €692,000 (2020: €834,000).
23. Key agreements, related party transactions and ultimate controlling
party
Key agreements, related party transactions and ultimate controlling party
Hg acts as Manager of HGT through a management agreement and indirectly
participates through fund limited partnership agreements as the general
partners and, alongside a number of Hg's executives (past and present), as the
founder partners of the fund partnerships in which HGT invests. In addition,
Hg acts as Administrator of HGT.
HGT has no ultimate controlling party.
HGT's related parties are its Directors. Fees paid to HGT's Board are
disclosed in the Directors' Remuneration Report on pages 129 to 131 in the
full Annual Report and employer's National Insurance contributions are
disclosed in note 6(a). There are no other identified related parties at the
year-end, and as of 4 March 2022.
24. Post balance sheet events
Since 31 December 2021, there have been no significant post balance sheet
events.
Independent auditor's report
to the members of HgCapital Trust plc
The Company's financial statements for the year ended 31 December 2021 have
been audited by Grant Thornton UK LLP. The text of the Auditor's Report can be
found on pages 102 to 109 of the full annual report and accounts.
Extracts from full Annual Report and Accounts
The Directors present the Annual Report and Accounts of HgCapital Trust plc
(HGT) (registered number 1525583) for the year ended 31 December 2021. The
Corporate Governance Report forms part of this Directors' Report. Information
about future developments and important events since the year end are included
in the Chairman's statement on pages 10-12 of the full Annual Report.
Results and dividend
The total return after taxation for the year was £595,137,000 (2020:
£246,955,000) of which the revenue return was £36,828,000 (2020: revenue
return of £16,809,000). Following payment of an interim dividend of
2.0 pence per ordinary share in October 2021, which was maintained at the
same level as the previous year, the Directors recommend the payment of a
final dividend of 5.0 pence per ordinary share for the year ended
31 December 2021, making a total of 7.0 pence (2020: 5.0 pence). Subject to
the approval of this dividend at the forthcoming Annual General Meeting (AGM),
it will be paid on 13 May 2022 to shareholders on the register of members at
the close of business on 18 March 2022.
Dividend
The Board reviews HGT's approach to dividends on a regular basis, taking into
consideration feedback from shareholders and the evolving nature of HGT's
income streams, which are driven by the investment structures Hg utilises in
its various transactions. The Board regards the full year dividend declared in
respect of 2020 (5.0 pence) as a sustainable level, absent some material shift
in underlying deal structures. From time to time, the pattern of deployment
and the income which may arise may allow for a higher level of dividend to be
supported. The current year is an example of such a year allowing a further
distribution of residual income and a higher full year dividend of 7.0 pence.
It is important to note that HGT, in order to qualify for investment trust tax
status, can only retain a maximum of 15% of the income.
Stewardship
For Hg, responsible investing means growing sustainable businesses which are
great employers and good corporate citizens, whilst also generating superior
risk adjusted returns for the shareholders of HGT, as well as other pensioners
and savers who are invested with Hg. Hg seeks to invest HGT's funds in
businesses which are well managed, with high standards of corporate
governance. The Directors of HGT believe this creates the proper conditions to
enhance long-term shareholder value and to achieve a high level of corporate
performance.
The exercise of voting rights attached to HGT's underlying investments lies
with Hg. Hg has a policy of active portfolio management and ensures that
significant time and resource are dedicated to every investment, with Hg
executives and Operating Partners typically being appointed to investee
company Boards, in order to ensure the application of active,
results-orientated corporate governance. Further information about the
stewardship of investee companies by Hg can be found in their review on pages
38-43 of the full Annual Report.
Greenhouse gas emissions
HGT has no greenhouse gas emissions to report from the operations of HGT, nor
does it have responsibility for any other emissions producing sources or
energy consumed reportable under the Companies Act 2006 (Strategic Report and
Directors' Report) Regulations 2013 or the Companies (Directors' Report) and
Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018,
implementing the UK Government's policy on Streamlined Energy and Carbon
Reporting. Hg has been carbon neutral since 2019 and more information on our
Manager's value chain carbon footprint can be found online at
www.hgcapital.com/responsibility.
As an investment company, HGT also does not need to report against the TCFD
framework, however, understanding and managing climate-related risks and
opportunities based on the TCFD´s recommendations is a fundamental part of
Hg's Sustainability Policy and Hg's inaugural TCFD report can be found on Hg's
website
https://hgcapital.com/wp-content/uploads/2021/11/Taskforce-on-Climate-related-Financial-Disclosures-Report-2021-Final.pdf
Risk management and objectives
HGT is subject to various risks in pursuing its objectives. The nature of
these risks and the controls and policies in place used to minimise these
risks are further detailed in the Strategic Report and in Note 19 to the
financial statements. The work of the Audit, Valuations and Risk Committee in
respect of risks management is described on page 123 of the full Annual
Report.
Financial instruments
HGT had no outstanding derivative contracts at 31 December 2021. Note 19 to
the financial statements describes the financial risk management objectives
and HGT's exposures to credit risk and liquidity risk.
Annual General Meeting (AGM)
The AGM of HGT will be held at 2 More London Riverside, London SE1 2AP on
10 May 2022 at 11 a.m.
Details of shareholder engagement and how to vote at this year's AGM are
contained in the Notice of AGM on pages 142-149 in the full Annual Report.
The Board is of the opinion that the passing of all resolutions being put to
the AGM would be in the best interests of HGT and its shareholders. The
Directors therefore recommend that shareholders vote in favour of all
resolutions as set out in the Notice of Meeting as they intend to do in
respect of their own shareholdings.
Directors' responsibility statement
in respect of the annual report and accounts
The Directors are responsible for preparing the Annual Report and Accounts in
accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law, the Directors have elected to prepare the
financial statements in accordance with United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting Standards and applicable law),
including FRS 102, the Financial Reporting Standard applicable in the UK and
Ireland.
Under company law the Directors must not approve the financial statements,
unless they are satisfied that they give a true and fair view of the state of
affairs of HGT and of the profit or loss of HGT for that period. In preparing
these financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and accounting estimates that are reasonable and prudent;
• state whether applicable UK Accounting Standards have been followed;
• assess HGT's ability to continue as a going concern, disclosing, as
applicable, matters relating to going concern; and
• use the going concern basis of accounting unless they either intend to
liquidate HGT or to cease operations, or have no realistic alternative but to
do so.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain HGT's transactions and disclose with reasonable
accuracy at any time the financial position of HGT and enable them to ensure
that the financial statements comply with the Companies Act 2006.
They are responsible for such internal control as they determine necessary to
enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error, and have responsibility for
taking such steps as are reasonably open to them to safeguard the assets of
HGT and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a Strategic Report, Directors' Report, Directors' Remuneration
Report and Corporate Governance Statements that comply with that law and those
regulations.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on HGT's website. Legislation in
the United Kingdom governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
Responsibility statement
The Directors of HGT, whose names are shown on pages 112-113 of the full
Annual Report, each confirm to the best of their knowledge that:
• the financial statements, prepared in accordance with the applicable set
of accounting standards, give a true and fair view of the assets, liabilities,
financial position and profit or loss of HGT taken as a whole; and
• the Strategic Report and Hg's Review include a fair review of the
development and performance of the business and the position of HGT, together
with a description of the principal risks and uncertainties that it faces.
The Directors consider the Annual Report and Accounts, taken as a whole, are
fair, balanced and understandable and the information provided to shareholders
is sufficient to allow them to assess HGT's position, performance, business
model and strategy.
On behalf of the Board
Jim Strang
Chairman
4 March 2022
Dividend
The final dividend proposed in respect of the year ended 31 December 2021 is
5.0 pence per share (following the interim dividend of 2.0 pence, bringing the
full year dividend to 7.0 pence per share).
Ex-dividend date 17 March 2022
(date from which shares are transferred without dividend)
Record date 18 March 2022
(last date for registering transfers to receive the dividend)
Last date for registering DRIP instructions (see below) 21 April 2022
Dividend payment date 13 May 2022
Directors
Jim Strang
Richard Brooman
Peter Dunscombe
Pilar Junco
Guy Wakeley
Anne West
National Storage Mechanism
A copy of the Annual Report and Accounts will be submitted shortly to the
National Storage Mechanism ("NSM") and will be available for inspection
there, situated at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism)
A copy of the Annual Report and Accounts, which includes the Notice of Annual
General Meeting, will be delivered to shareholders shortly and can also be
found at https://www.hgcapitaltrust.com/ (https://www.hgcapitaltrust.com/)
END
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