REG - HgCapital Trust PLC - Annual Financial Report
13/03/2023 07:00
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RNS Number : 6480S HgCapital Trust PLC 13 March 2023
HGCapital Trust plc
Legal Entity Identifier: 213800J7QUJJBEFSIN38
ANNUAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2022
AND NOTICE OF ANNUAL GENERAL MEETING
HgCapital Trust plc
ANNUAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2022
Resilient NAV performance in a challenging macro environment
London, 13 March 2023: HgCapital Trust plc ('HGT'), today announces its
annual results for the year ended 31 December 2022.
HGT provides investors with a listed vehicle to invest in unquoted businesses
managed by Hg, Europe's largest investor in software & technology-enabled
services businesses.
The objective of HGT is to provide shareholders with consistent long‑term
returns in excess of the FTSE All‑Share Index by investing predominantly in
unquoted companies where value can be created through strategic and
operational change.
Highlights over 2022 include:
¡ Strong portfolio trading continued to be the main driver of performance,
contributing to a total return NAV increase of 5.4%, closing the year at
456.6p NAV per share and net assets of £2.1 billion
¡ Share price total return of -15.1% over the year, closing at 350.50p per
share and a market capitalisation of £1.6 billion
¡ Continued investment, deploying £527 million alongside Hg, Europe's
largest investor in software & service businesses, including seven new
portfolio companies
¡ £404 million returned to HGT, including three full realisations at an
average multiple of 3.9x invested cost, and at an average uplift of 28% to
December 2021 reported NAV
¡ Continued and significant long-term NAV outperformance of the FTSE
All-Share
¡ Performance provided through access to Hg's investments, which would in
aggregate represent the second largest and the fastest growing technology firm
in Europe(( 1 (#_ftn1) )).
An investment of £1,000 made 20 years ago in HGT would now be worth £26,777,
a total return of 2,578%. An equivalent investment in the FTSE All-Share Index
would be worth £4,361. 2 (#_ftn2)
Jim Strang, Chairman of HGT, commented:
"The HGT portfolio is made up of 48 individual companies, spread across eight
end-market 'clusters' which are well known to Hg. These investments operate
across the B2B software and technology-enabled business services sectors. As
part of the long-standing investment strategy adopted by Hg, these companies
typically benefit from sector leading market positions and have highly
resilient and defensive business models with loyal customers and high rates of
recurring revenues. The portfolio has continued to deliver strong operating
performance in the last year, despite the many and obvious challenges
presented in the broader global economy. Looking forward, the environment
seems set to remain challenging, however the investment model adopted by HGT
and the strength of the portfolio augurs well for its continued successful
development."
David Toms, Head of Research at Hg, commented:
"Increasingly, we see this environment as one of opportunity, as valuation
adjustments create the
opportunity to acquire businesses with attractive long-term performance."
SUMMARY performance
28 February % Total 31 December 31 December % Total
2023
return
2022
2021
return
NAV per share 450.9p -1.2% 456.6p 440.5p +5.4%
Share price 363.0p +3.6% 350.5p 420.5p -15.1%
FTSE All-Share Index +6.1% +0.3%
YTD 2023 2021
Movement
Movement
Net Asset Value £2.1bn -£26m £2.1bn £2.0bn +£84m
Source: Hg, Factset. All references to total return allow for all historic
dividends being reinvested
Note: Hg undertakes full revaluations of the portfolio on a quarterly basis,
the next process being 31 March 2023, therefore the movement in unrealised
value of the portfolio to the end of February 2023 is attributable to FX only.
Performance overview
Net assets of £2.1 billion, with continued long-term outperformance of the
FTSE All-Share over one, three, five, ten and twenty-year periods:
- NAV per share of 456.6p, a total annual return of +5.4% to 31
December 2022.
- Share price total return of -15.1% over the year.
- Proposed final dividend of 4.5p 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 30% and 25% respectively across the top
20 investments (77% of the portfolio) over the last twelve months.
- £404 million of cash returned to HGT through realisations at
uplifts to book value and refinancings.
- Valuation multiple (EV/EBITDA) of 27.2x and net debt to EBITDA ratio
of 8.0x for the top 20 investments (77% of the portfolio).
Continued investment and commitments to drive future value:
- Continued investment with £527 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 Saturn 3 and Hg Genesis 10
funds, totalling c. £630 million, with total outstanding commitments at 31
December 2022 of £1.2 billion (December 2021: £992 million). These will be
deployed over the next three to four years.
Credit facility, new equity issuance and share buybacks:
- In November, the Board of HGT agreed a £40 million increase to the
multi-currency revolving credit facility bringing the total facility to £290
million.
- £12 million of new equity raised via tap issuance, and £1.4
million share buyback over 2022.
POST PERIOD EVENTS
§ NAV of 450.9p at 28 February, YTD performance of -1.2% reflecting FX
movements.
§ Net assets of £2.1 billion at 28 February.
§ Share price of 363.0p at 28 February, YTD performance of +3.6%.
§ Estimated gross proceeds of £108 million from the sale of Transporeon to
be received in Q2 2023.
§ Estimated £18 million invested by HGT, primarily into 3 existing
investments.
§ Further £60m increase to the revolving credit facility bringing the total
facility to £350m, of which £350m was available at the date of this release.
§ Available liquid resources (including the credit facility) post-completion
of all announced transactions and the full year dividend payable in May 2023,
are £606 million (29% of 28 February pro-forma NAV).
§ Outstanding commitments of £1.1 billion (53% of 28 February pro-forma
NAV). We expect these to be drawn down over the next three to four years.
§ Secondary sale of 25% of HGT's investment in Hg Genesis 8 at 100% of 31
December 2022 net asset value. HGT expects to receive c. £90m of proceeds.
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 a challenging macro environment, Hg's portfolio has demonstrated
resilient performance.
§ During 2022, we remained focused on returning capital to Hg clients,
distributing c. £4 billion of liquidity, including £404 million to HGT.
§ The portfolio companies remain focused on selling business-critical and
non-discretionary software and services to their underlying business
customers, delivering predictable levels of recurring revenue.
§ We believe that the structural drivers of growth in our sector are, if
anything, enhanced by the macro-economic shifts we see, as companies invest in
technology in order to help offset wage and cost inflation.
§ HGT's commitments to Hg funds provide visibility over capital deployment in
what we anticipate will be attractive vintages. Increasingly we see this
environment as one of opportunity as valuation adjustments create the
opportunity to acquire businesses with attractive long-term performance.
§ Further liquidity events are expected over the next twelve months.
- Ends -
The Company's 2022 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
Azadeh Varzi +44 (0)20 7404 5959
About HgCapital Trust plc
HgCapital Trust plc is an investment company whose shares are listed on the
London Stock Exchange (HGT.L). HGT gives investors exposure, through a liquid
vehicle, to a portfolio of high-growth unquoted companies, managed by Hg, an
experienced and well-resourced private equity firm with a long-term track
record of delivering superior risk-adjusted returns for its investors.
For further details, see www.hgcapitaltrust.com
(http://www.hgcapitaltrust.com) and www.hgcapital.com
(http://www.hgcapital.com)
HgCapital Trust plc
Annual Report and Accounts and Notice of Annual General Meeting
HgCapital Trust plc (the "Company" or "HGT") announces its annual results for
the year ended 31 December 2022 and the publication of its annual report and
accounts for the same period, which includes the notice of Annual General
Meeting.
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.
FINANCIAL AND PERFORMANCE HIGHLIGHTS
2022 performance at a glance
£2.1bn
Net assets
31 December 2021: £2.0bn
+5.4%
NAV per share (456.6p)
31 December 2021: +43.9%
£1.6bn
Market capitalisation
31 December 2021: £1.9bn
-15.1%
Share price (350.5p)
31 December 2021: +39.8%
7.0p
Full year dividend
31 December 2021: 7.0p
1.7%
Total ongoing charges
31 December 2021: 1.4%
£527m
Cash invested on behalf of HGT
31 December 2021: £424m
£404m
Cash returned to HGT
31 December 2021: £271m
£476m
Available liquid resources
(23% of NAV)
31 December 2021: £470m
£1.2bn
Outstanding commitments
(57% of NAV)
31 December 2021: £992m
Note NAV per share and share price return on a total return basis assuming all
historical dividends have been re-invested, which is an Alternative
Performance Measure ('APM').
Top 20 investments (77% of portfolio value)
A snapshot as at 31 December 2022
£9.5bn
LTM revenues
31 December 2021: £6.3bn
£2.8bn
LTM EBITDA
31 December 2021: £2.2bn
29%
EBITDA margin
31 December 2021: 35%
+30%
LTM sales growth
31 December 2021: +27%
+25%
LTM EBITDA growth
31 December 2021: +30%
27.2x
EV to EBITDA multiple
31 December 2021: 27.4x
8.0x
Top 20 net debt to EBITDA ratio
31 December 2021: 7.1x
CHAIRMAN'S STATEMENT
The HGT portfolio is made up of 48 individual companies, spread across eight
end-market 'clusters' which are well known to Hg. These investments operate
across the B2B software and technology-enabled business services sectors. As
part of the long-standing investment strategy adopted by Hg, these companies
typically benefit from sector leading market positions and have highly
resilient and defensive business models with loyal customers and high rates of
recurring revenues.
Jim Strang, Chairman, HgCapital Trust plc
Dear Shareholder,
Last year was another year of considerable challenge and volatility both
economically and geo-politically. For the first time in a number of years,
rates of inflation increased dramatically on a global basis while central
banks materially increased interest rates. In addition, the tragic and ongoing
conflict in the Ukraine acted to exacerbate inflationary pressures, not to
mention increasing levels of geo-political risk to a point not seen for a
generation. Against this challenging backdrop, the HGT portfolio performed
well for shareholders, although this was not reflected in the share price:
Highlights in 2022 included:
• 5.4% NAV per share growth on a total return basis, with net assets of
£2.1 billion;
• £527 million of new and further investments by HGT, primarily into seven
new businesses across the core investment clusters targeted by Hg;
• £630 million newly committed to invest alongside new Hg funds over the
next three to four years;
• £404 million of £404 million of proceeds returned to HGT, with three
full realisations at an average uplift to book value of 28%.
Performance
The NAV of HGT increased by 5.4% over the year, reflecting the ongoing
strength of the operating performance of the HGT portfolio, offset by a
reduction in the valuation multiple ascribed to high-growth software assets
globally. While the portfolio continued to develop very much in line with
progress seen in recent years, HGT's share price declined by 15.1%.
The events of the year saw a marked change in the private equity deal making
environment, notably in the second half of the year, as new investment and
divestment activity significantly reduced. Despite the challenging market
conditions, the strength and focus of the Hg investment model allowed
significant progress to be made across the portfolio over the year. Seven new
platform investments were made in 2022 with HGT's share of these deals
representing a total of £527 million of capital invested. These new
investments all comply with the proven Hg investment strategy which targets
software and technology-enabled business services in eight specific
sub-sectors or 'clusters'. As I have noted in previous reports, the Hg model
is based around supporting the portfolio companies to achieve their full
potential and in creating larger and more valuable businesses as a result
which are much sought after in the markets they operate in. Consequently,
despite the challenging market conditions, Hg was able to deliver a number of
realisation events over the course of the year, returning £404 million to HGT
in cash. Three full exits in the year were delivered at an average exit
multiple of 3.9x cost and achieved at an average uplift of 28% to their
December 2021 valuations. These exits returned considerable cash to HGT.
Valuations are an area of continued focus for the Audit Valuation and Risk
Committee.
At the end of the year, the HGT portfolio consisted of 48 investments, all of
which conform to the Hg sector and investment strategy and in aggregate these
assets have continued to perform very well. The top 20 portfolio companies
(77% of the portfolio by value) generated revenue growth of 30% over the year,
while associated EBITDA grew by 25%. Across the entire portfolio, three
businesses were held below their investment cost at the end of the year,
representing 2% of the aggregate portfolio value.
Fundraising
Hg's success in building and creating value in the portfolio supported a new
round of fundraising in the year, in which HGT participated, to support HGT's
long-term NAV growth ambitions. Hg successfully raised significant capital for
the Hg Saturn and Hg Genesis fund families in the year and as further funds
are raised over the first half of 2023, HGT will continue to participate as
Hg's largest single investor. HGT's commitments to the new Hg funds ensure
that HGT maintains access to Hg's deal flow, including co-investment
opportunities, in what is anticipated to be an attractive environment for new
investments. HGT continues to benefit from a unique opt out clause within its
underlying investment agreements with Hg, which provides a useful risk
management tool for the Board in managing and optimising the HGT balance
sheet.
Balance sheet
In order to grow the NAV of our portfolio and deliver returns for
shareholders, HGT operates in a continual cycle of commitment, investment and
realisation of the underlying investments. This process involves continual
monitoring and revision of forecasts and estimates, as they relate to the
portfolio and an optimisation of the HGT balance sheet to fund these
strategies.
Looking forward, as the environment seems set to remain challenging, we have
looked to pull on specific levers to optimally balance future portfolio
investment, cash flow management and uncertainties.
Increase in credit facility
As part of this process, HGT uses a revolving credit facility to support the
investment programme and to improve balance sheet efficiency. In 2022, HGT
increased its facility to c. £290 million and has recently secured approval
with lenders for a further increase to £350 million. The upsizing of the
facility will aid in the cashflow management of HGT in what seems likely to be
a more uncertain deal environment and, while the total quantum of the facility
is notably larger than shareholders will recall from prior years, it is very
much in line with the relative sizing of the debt facility to the HGT overall
balance sheet witnessed in the past.
Share issuance and buybacks
In addition to the credit facility, HGT seeks to take advantage of
opportunities to issue new shares to support the investment strategy at times
when doing so would be accretive to shareholders. During 2022, HGT issued £12
million worth of new shares at a small premium to the prevailing NAV and in
the third quarter of the year, the Board executed a small share buyback
programme (utilising £1.4 million of cash on the balance sheet) within the
guidelines of the recently updated and revised HGT discount control policy.
HGT portfolio management
In addition to seeking to optimise the balance sheet through debt and equity
capital markets, the Board also looks to take advantage of market driven
opportunities to manage the portfolio construction of HGT, achieving the
optimal balance of asset and vintage exposure through the Hg fund structures
that contain the investments that make up the HGT portfolio. The rapidly
increasing depth and sophistication of the secondary market for such private
equity fund interests, provides a valuable additional tool to the Board in the
management of HGT's exposure and liquidity.
As part of this process, HGT has agreed to sell c. 25% of HGT's remaining
investment in Hg's Genesis 8 Fund. Hg Genesis 8, a 2017 vintage fund, has
performed very strongly, and is currently valued at 3.2x invested cost, an
outcome that is already above the fully realised performance of all Hg's
historical funds. The proposed transaction envisages a sale to a leading
secondary fund, an institutional Private Equity buyer of mature fund
interests, at a price equal to 100% of Hg Genesis 8's December 2022 NAV. The
pricing level achieved in this transaction provides further strong validation
of the HGT valuation policy, given the independent price setting provided by
the buyer. The proposed transaction will generate proceeds to HGT of just over
£90 million.
The Board and the Manager have also agreed to take advantage of the
opportunity to reduce HGT's commitment to Hg Saturn 3 by c. 15%, in light of
the significant change in the deal environment since the establishment of the
fund and, in addition, the c.15% appreciation of the USD against GBP. Drawn
capital to-date will be repaid pro-rata to HGT, with no negative impact on the
HGT balance sheet from the proposed resizing of the fund commitment executing
these steps, as HGT is simply exchanging invested NAV at par for cash.
The adjustments to the HGT investment profile not only allow for significant
cash to be returned to HGT at attractive valuations but allows for increased
investment flexibility ahead of what is envisaged to be an attractive period
for new investment, particularly through increased exposure to co-investments
where HGT has a stated goal of investing up to 10% of capital. A final benefit
of these proposed adjustments is that they provide a mechanism to help manage
the single asset concentration in the largest individual investment in the
portfolio, Access. We will keep shareholders informed on the progress of these
transactions, subject to customary closing conditions.
The portfolio has continued to deliver strong operating performance in the
last year, despite the many and obvious challenges presented in the broader
global economy. Looking forward, the environment seems set to remain
challenging, however the investment model adopted by HGT and the strength of
the portfolio augurs well for its continued successful development.
Jim Strang, Chairman, HgCapital Trust plc
Impact and responsible investment
Your Board and the Manager, Hg, continue to increase their focus on the topics
of ESG and sustainability. We share a firmly held view that not only should
the financial returns to you, the shareholders, be attractive, but these must
be delivered in a manner which is consistent with our responsibility to
society. As a technology investor, we understand the need to ensure that those
businesses in which we invest reduce their carbon footprint and contribute to
tackling climate change.
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 well understood and
endorsed by the Board. As we have previously reported, Hg launched The Hg
Foundation in 2020 - a charitable initiative to provide funding and
operational support to initiatives across Europe, the UK and the US. The Hg
Foundation's goal is to have an impact on the development of those skills and
learning most required for employment within the technology industry, focusing
on individuals who might otherwise experience barriers to access this
education. This Foundation is funded by the Hg management company and its team
members.
For Responsible Investment: see pages 32 to 33 of the Manager's Review in the
full Annual Report and Accounts
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.
As regards the current financial year, HGT will deliver a full year dividend
of 7.0 pence per share (2021: 7.0 pence per share), payable in May. The Board
keeps the dividend objective of HGT under regular review and will communicate,
to shareholders, further guidance on the dividend when it is practicable to do
so.
Dividend: see page 119 of the full Annual Report and Accounts.
Dividend re‑investment plan: page 32 in the full Annual Report and Accounts.
Board and governance
Peter Dunscombe retired from the Board and from his role as the Chair of the
Management Engagement Committee (MEC) at the AGM in May, after 8 years of
service to HGT. On behalf of myself and my fellow Directors, I would like to
thank Peter for his significant contribution to HGT over his tenure on the
Board. HGT benefited a great deal from his experience and wise counsel.
Dr Erika Schraner joined the Board in August and has taken on Peter's former
responsibility as MEC Chair. Erika brings a great deal of relevant experience
to HGT from a long and successful executive career in the technology sector,
both in Europe and America, and I am sure will make a very significant
contribution to HGT in the years to come. With Erika joining the Board, the
composition of the Board is now equally balanced between male and female Board
members. Over the course of this year, HGT will commence the process to
recruit a further Director ahead of the next evolutionary step in the Board
development, which will see Anne West retire in 2024. This new recruitment
will be externally supported and will follow HGT's process for adding the
requisite skills to the Board to meet evolving needs. As ever, this process
will be targeted to provide a wide and diverse mix of candidates to further
support HGT's progress on diversity in line with relevant guidelines.
I am pleased to report that the annual Board review process undertaken over
the year and externally supported, shows the Board to be functioning very
well. As part of the continuous effort to improve governance, the Board
implemented a new software tool, BoardClic, to provide more objective insights
into the effectiveness of the Board, by comparing the performance of the HGT
Board with a large peer set. I am pleased to say that this process revealed
the HGT Board to be amongst the highest scoring Boards on the platform.
Prospects
The year ahead seems set to be as volatile and uncertain as the year that
preceded it. However, HGT is well placed to be able to navigate this
uncertainty. The Manager, Hg, remains focused on its clearly defined
investment strategy of backing resilient growth businesses, and has a proven
ability to operate in challenging markets. Testament to that is the highly
successful fundraisings completed by Hg in what is a very challenging market
for private equity managers. The existing portfolio is robust and continues to
deliver attractive organic growth, augmented by M&A. Given these factors,
the Board believes that the year ahead can be approached with a degree of
confidence.
Jim Strang
Chairman
10 March 2023
THE MANAGER'S OUTLOOK
Increasingly, we see this environment as one of opportunity, as valuation
adjustments create the opportunity to acquire businesses with attractive
long-term performance.
David Toms, Head of Research, Hg
Market update
We remain alert to the ongoing challenges in the broader economy from the
geopolitical background, fiscal tightening, and cost increases, and are
increasingly excited about the structural opportunities the current 'risk-off'
environment could create for a long-term investor like Hg.
A 'typical' downturn tends to lead with multiple contraction, followed by
reduced earnings, and an eventual recovery catalysed either, in recent
downturns, by central bank stimulus, or historically, corporate earnings
recovery. For our sector going into an economic downturn, short-term changes
in value are largely a result of changes in valuation multiples; while the
eventual change in earnings forecasts is typically a fraction of the change in
multiple that precedes it. For example, in the 2008/9 downturn, multiples
accounted for about three-quarters of the total change in value. Earnings
typically remain very robust in comparison. Looking at the current situation,
public market valuations stabilised in H2 2022, after a significant decline in
H1. This is consistent with increased investor confidence around the path of
interest rates over the next two years.
As important as multiples are for short-term changes in value, their relevance
decreases with longer investment horizons, supplanted by the growing
significance of earnings growth. We show in the graph below the relative
contribution of movements in valuation multiple and earnings, to returns for
major publicly listed software and services companies. For example, if the
forward Price:Earnings ratio falls from 15 to 13.5, that is a negative 10%
impact on overall returns in the year, and if the forward earnings forecast
were to increase from 10 to 12, that would be a positive 20% impact. The
shaded backgrounds represent cumulative returns from either earnings or
multiple from 2003 up until the relevant year.
Over the total 20-year period of this graph, the multiple has delivered a
negligible contribution to cumulative returns (broadly, good years and bad
years cancel); the c. 8x total performance is almost entirely from earnings
growth which was positive in 19 of the past 20 years.
As we move into 2023, the focus shifts to earnings where we are seeing a
heightened level of downgrades to expectations from public companies. Although
currency (specifically the strength of the USD) is an important factor in
this, the broader backdrop is less benign than prior years, and we expect to
see some pressure on sales to new customers who may be more reluctant to
commit to new software and services solutions. Within our portfolio, such new
business revenue is a small proportion of the total; the overwhelming majority
of our portfolio companies can deliver revenue growth from the existing
customer base alone, via cross-sell and up-sell. The impact across the
industry, and our portfolio, from 2022's price increases (which may not take
full effect until 2023), also helps to moderate any pressure from delayed new
customer wins. These price increases across the sector result from a
combination of ongoing long-term product innovation, and the greater value for
customers of utilising software solutions in a constrained labour market
(especially for higher-cost 'white collar' labour). This provides strong
support for our ongoing view that inflation will have only a muted long-term
impact on Hg investments.
A clear positive from all this is that as earnings reassert their dominance in
valuation, we return to an environment where the operating performance of our
portfolio once again becomes the main driver of value creation. We believe
that the structural drivers of growth in our sector are, if anything, enhanced
by the macro-economic shifts we see, as companies invest in technology in
order to help offset wage and cost inflation.
All investments sit within Hg's 'sweet-spot' in software and
technology-enabled business services across eight industry verticals or
'clusters' and continue to show Hg's role as one of the largest software
groups in the world.
Luke Finch, Head of Client Services, Hg
Valuation environment
We believe that we are moving from an environment dominated by macro factors,
back to one where sector and company performance is the key driving factor.
Valuations in 2021 and the first half of 2022 were dominated by macro factors,
particularly interest rate expectations. These led to 'unprofitable software'
experiencing a much greater decline than 'profitable software'. In the second
half of 2022, all valuations (equities generally, software, and 'unprofitable
software') saw a much more stable pattern. Throughout 2022, we also saw
repeated evidence that there is still investor demand for the highest quality
businesses, such as those that make up the Hg portfolio. Furthermore, the
valuation environment for these businesses has been much more stable than
public markets would suggest; we continue to see exits above book value, and
well above public market comparators.
Our valuation process is based partly on public comparators, and similarly to
our portfolio companies, the vast majority of these are profitable,
established businesses. As we have shown in prior reports, such businesses
have shown much more limited valuation volatility than the high-growth, low/no
profit businesses that headline more often in the media.
Consistent with our previous commentary, in any quarter, there are two main
factors influencing our valuations: earnings multiple change in public and
private comparators, and growth in actual earnings. Our companies typically
grow their EBITDA by c. 10-15% organically each year (i.e. c. 3-4% each
quarter) and often double this on an 'all in' basis i.e. including M&A. In
addition, our valuations also have to input observed private markets
comparators, which have been far less volatile than the public comparators.
The latter two factors have meant that our funds have been less exposed to
public market volatility (both on the way up and the way down), as well as
providing some protection against broader de-rating in the long-term. The
relative pace of movements (public rating changes can be relatively rapid;
earnings growth and private comparators tend to be much steadier) dictates
movements in any one quarter, but over the long term, earnings growth tends to
dominate.
Activity levels
Over 2022, Hg invested more than £7 billion, primarily into 14 new and
further investments, including £527 million on behalf of HGT. All these
investments sit squarely within Hg's 'sweet-spot' in software and
technology-enabled business services across eight industry verticals or
'clusters', on which we exclusively focus. This investment continues to show
Hg's role as one of the largest investment software groups in the world,
whether measured as an investor, or as an industry participant.
We have commented previously that in any rolling 12 month period, the
investment teams across Hg 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 also generally seek to deliver similar numbers of liquidity
events (sales or partial sales of portfolio companies and refinancings) each
year. We believe the pace of investment should continue at broadly this level
over the medium term. However, while we continue to see many compelling
opportunities, we have seen a period of reduced activity, which may continue
through to the summer as seller expectations adjust and react to the
macro-outlook and in particular the new interest rate environment.
From any new investments we make, there is a further flow of M&A
opportunities, adding to the breadth and depth of our organic development and
catalysing cross sales to existing and acquired customers. On average, our
portfolio companies may acquire two to three businesses a year, meaning across
a portfolio of over 45 B2B software and technology-enabled business services
we would typically expect to make more than 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 of the businesses within Hg's
portfolio now totals to over $120 billion at 31 December 2022.
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 S3/G8/HGT ERP & Payroll UK 2018 180,509 339,096 13.9 13.9
2 Visma G7/S1/S2/HGT Tax & Accounting/ERP & Payroll Scandinavia 2020 88,441 202,743 8.2 22.1
3 IFS Workwave S3/HGT ERP & Payroll Scandinavia 2022 133,551 145,635 5.9 28.0
4 Litera G8/G9 Legal & Regulatory Compliance N.America 2019 28,999 108,363 4.4 32.4
5 Howden S2/HGT Insurance UK 2021 60,940 108,257 4.4 36.8
6 Transporeon G8/HGT ERP & Payroll Germany 2019 41,993 106,581 4.3 41.1
7 IRIS S1 Tax & Accounting/ERP & Payroll UK 2018 36,380 87,531 3.6 44.7
8 P&I G7/S1/HGT ERP & Payroll Germany 2020 44,156 86,809 3.5 48.2
9 Ideagen G10/G9/M3 Legal & Regulatory Compliance UK 2022 74,434 82,655 3.4 51.6
10 Septeo G9 Legal & Regulatory Compliance France 2020 38,545 74,489 3.0 54.6
11 insightsoftware S2/HGT Tax & Accounting N.America 2021 57,494 72,349 2.9 57.5
12 team.blue G10/G8 Tech Services Benelux 2018 43,304 66,374 2.7 60.2
13 Sovos S2/HGT Tax & Accounting N.America 2020 54,455 63,977 2.6 62.8
14 FE fundinfo M2/G9 Capital Mkts & Wealth Mgmt IT UK 2017 26,154 60,392 2.5 65.3
15 MeinAuto G8 Automation and Engineering Germany 2017 33,967 54,822 2.2 67.5
16 Intelerad G8 Healthcare IT N.America 2020 15,978 52,532 2.1 69.6
17 Lyniate M2/M3/HGT Healthcare IT N.America 2018 19,260 47,724 1.9 71.5
18 Norstella M2/G9/HGT Healthcare IT N.America 2021 29,274 45,969 1.9 73.4
19 Argus Media S1/HGT Capital Mkts & Wealth Mgmt IT UK 2020 27,384 45,047 1.8 75.2
20 Azets G7/HGT Tax & Accounting UK 2016 20,966 44,767 1.8 77.0
21 Caseware G8 Tax & Accounting N.America 2020 28,612 40,049 1.6 78.6
22 Trackunit G9 Automation and Engineering Scandinavia 2021 26,593 37,464 1.5 80.1
23 Waystone S2 Legal & Regulatory Compliance UK 2022 38,449 36,896 1.5 81.6
24 GGW M2/M3 Insurance Germany 2020 12,761 34,868 1.4 83.0
25 Citation G8 Tech Services UK 2020 21,998 33,225 1.3 84.3
26 Benevity S2/HGT ERP & Payroll N.America 2021 32,124 30,013 1.2 85.5
27 Gen II G9 Capital Mkts & Wealth Mgmt IT N.America 2020 19,921 29,813 1.2 86.7
28 Prophix G9 Tax & Accounting N.America 2021 17,139 28,889 1.2 87.9
29 Project CH S2 Tax & Accounting Germany 2021 18,439 24,415 1.0 88.9
30 HHA G9 Healthcare IT N.America 2021 24,035 24,133 1.0 89.9
31 Riskalyze M3/HGT Capital Mkts & Wealth Mgmt IT N.America 2021 15,868 21,947 0.9 90.8
32 DEXT S1/HGT Tax & Accounting UK 2021 15,620 21,379 0.9 91.7
33 Revalize G9 ERP & Payroll N.America 2021 18,686 21,135 0.9 92.6
34 TeamSystem G8 Tax & Accounting/ERP & Payroll Italy 2021 14,250 20,793 0.8 93.4
35 LucaNet G9 Tax & Accounting Germany 2022 15,649 17,993 0.7 94.1
36 Commify M1/HGT Tech Services UK 2017 4,080 17,123 0.7 94.8
37 smartTrade M2/HGT Capital Mkts & Wealth Mgmt IT France 2020 18,821 16,302 0.7 95.5
38 Serrala G9 Tax & Accounting Germany 2021 23,086 15,057 0.6 96.1
39 Geomatikk M2/HGT Tech Services Scandinavia 2021 11,392 14,580 0.6 96.7
40 Pirum M3/HGT Capital Mkts & Wealth Mgmt IT UK 2022 13,928 14,280 0.6 97.3
41 F24 M2/HGT Tech Services Germany 2020 10,458 13,590 0.6 97.9
42 Silverfin M2/HGT Tax & Accounting Benelux 2019 10,046 12,834 0.5 98.4
43 Auvesy M3 Automation and Engineering Germany 2021 8,204 12,109 0.5 98.9
44 Mitratech G7/HGT Legal & Regulatory Compliance N.America 2017 3,328 10,841 0.4 99.3
45 Fonds Finanz M3 Insurance Germany 2022 8,309 9,845 0.4 99.7
46 TrustQuay M3 Capital Mkts & Wealth Mgmt IT UK 2022 8,970 9,156 0.4 100.1
47 Bright M3 ERP & Payroll Ireland 2021 6,529 8,186 0.3 100.4
48 Project DS M3 ERP & Payroll Benelux 2022 2,676 3,138 0.1 100.5
Total buyout investments (48) 1,506,155 2,476,165 100.5
Other Hedges and other fund interests 13,142 (11,584) (0.5) (0.5)
Total all investments 1,519,297 2,464,581 100.0
(1)Including accrued income of £133,534,000, but before a deduction for the
provision for carried interest of £211,155,000 and fund level facilities of
£367,383,000. Note that the investments held at fair within the Balance Sheet
on page 59 of the full Annual Report and Accounts exclude accrued income but
include the deduction for carried interest and the fund level facilities.
DIVIDEND
The final dividend proposed in respect of the year ended 31 December 2022 is
4.5 pence per share (following the interim dividend of 2.5 pence, bringing the
full year dividend to 7.0 pence per share).
Ex-dividend date 23 March 2023
(date from which shares are transferred without dividend)
Record date 24 March 2023
(last date for registering transfers to receive the dividend)
Last date for registering DRIP instructions 27 April 2023
Dividend payment date 22 May 2023
NOTICE OF ANNUAL GENERAL MEETING
The Annual General Meeting of the Company will be held on Wednesday, 17 May
2023 at 11.00 am at the offices of Hg, 2 More London Riverside, SE1 2AP. The
formal Notice of AGM can be found within the 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 (pages 126 to 133 of the Annual Report available on
HGT's website) as they intend to do in respect of their own shareholdings.
FURTHER INFORMATION
HGT's Annual Report and Accounts for the year ended 31 December 2022 (which
includes the notice of meeting for the Company's AGM) will be available today
on www.hgcapitaltrust.com (http://www.hgcapitaltrust.com)
It will also be submitted shortly in full unedited text to the Financial
Conduct Authority's National Storage Mechanism and will be available for
inspection at data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism) in accordance with
DTR 6.3.5(1A) of the Financial Conduct Authority's Disclosure Guidance and
Transparency Rules.
ENDS
Neither the contents of the Company's website nor the contents of any website
accessible from hyperlinks on this announcement (or any other website) is
incorporated into, or forms part of, this announcement.
1 (#_ftnref1) 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.
(#_ftnref2)
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