REG - HgCapital Trust PLC - Annual Financial Report
11/03/2024 07:00
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RNS Number : 2403G HgCapital Trust PLC 11 March 2024
HgCapital Trust plc
ANNUAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2023
RESILIENT NAV PERFORMANCE DRIVEN BY STRONG TRADING IN THE UNDERLYING
PORTFOLIO AND CONTINUED REALISATION ACTIVITY IN A CHALLENGING MACRO
ENVIRONMENT
London, 11 March 2024: HgCapital Trust plc ('HgT'), today announces its
annual results for the year ended 31 December 2023.
HgT provides investors with a listed vehicle to invest in unquoted businesses
managed by Hg, Europe's largest investor in software & services companies.
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 businesses where value can be created through strategic and
operational change.
This objective has been demonstrated with a 10-year share price total return
of +18.8% p.a.
Highlights over 2023 include:
¡ Strong portfolio trading continued to be the main driver of performance,
contributing to a total return NAV increase of 11.1%, closing the year at
500.5p NAV per share and net assets of £2.3 billion.
¡ Share price total return of +26.2% over the year, closing at 434.5p per
share and a market capitalisation of £2.0 billion.
¡ Discount narrowed from 23% to 13%.
¡ Continued investment, with £74 million of new and further investments by
HgT across the core investment clusters targeted by Hg; with a further
estimated £148 million of transactions signed pending closing in 2024.
¡ £324 million of realisations, with full and partial realisations at an
average uplift of 25% to the carrying value at 31 December 2022; an estimated
further £191m of realisations signed and due to complete in 2024.
For the third year in a row, HgT tops a list of investment companies that
would have made investors more than £1 million, according to research from
The Association of Investment Companies (AIC).
Investing the full ISA allowance annually from 1999 to 2023, a total of
£306,560, and reinvesting the dividends in HgT shares would have generated a
tax-free amount of over £2.2m by 31 January 2024.
Jim Strang, Chairman of HgT, commented:
"HgT delivered a resilient performance in 2023, successfully navigating
challenging market
conditions. The portfolio maintained strong underlying performance over the
year with sales and EBITDA across the top 20 investments (76% of the
portfolio) growing at 25% and 30% respectively. Investment activity was
notably lower in the first half of 2023 than seen in previous years, as the
Manager took a cautious stance on investment activity. However, a
stabilisation in market conditions supported an increase in activity for the
kind of highly sought-after companies that constitute the portfolio,
throughout the second half of the year."
David Toms, Head of Research at Hg, commented:
"During a period of increased volatility, the resilience of the Hg portfolio
has been demonstrated with valuations and profitability remaining stable.
HgT's companies are characterised by visible and greater than 90% recurring
revenues, attractive margins of over 30% and by the ability to grow EBITDA
organically by 10 to 15% each year, with further growth coming from M&A
activity. These characteristics provide exceptional resilience when the cycle
swings downward and form a stable platform for accelerating growth when market
conditions recover."
SUMMARY performance
29 February % Total 31 December 31 December % Total
2024
return
2023
2022
return
NAV per share 500.4p -0.0% 500.5p 456.6p +11.1%
Share price 440.0p +1.3% 434.5p 350.5p +26.2%
FTSE All-Share Index -1.1% +7.9%
YTD 2024 2023
Movement
Movement
Net Asset Value £2.3bn +£0m £2.3bn £2.1bn +£201m
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 2024, therefore the movement in unrealised
value of the portfolio to the end of February 2024 is attributable to FX only.
Performance overview
Net assets of £2.3 billion, with continued long-term outperformance of the
FTSE All-Share over one, three, five, ten and twenty-year periods:
- NAV per share of 500.5p, a total annual return of +11.1% to 31
December 2023.
- Share price total return of +26.2% over the year.
- Proposed final dividend of 4.5p per share (full year dividend of
6.5p per share).
Strong double-digit growth from the top 20 portfolio:
- Revenue and EBITDA growth of 25% and 30% respectively across the top
20 investments (76% of the portfolio) over the last twelve months, EBITDA
margins of 31%.
- Valuation multiple (EV/EBITDA) of 26.1x and net debt to EBITDA ratio
of 7.4x for the top 20 investments (76% of the portfolio).
Continued portfolio activity and commitments to drive future value:
- £324 million of realisations, including full and partial exits,
refinancings and secondary Hg fund transactions.
- Continued investment with £74 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.
- Further commitments of c. £183 million to Hg Funds, with total
outstanding commitments at 31 December 2023 of £1.2 billion. These will be
deployed over the next three to four years.
POST PERIOD TO 29 FEBRUARY 2024
§ Pro forma NAV per share of 500.4p.
§ Pro forma Net assets of £2.3 billion.
§ Share price of 440.p, performance of +1.3% since 31 December 2023.
Realisations and investments
§ The sale of Argus that completed in February 2024 represented the fourth
material realisation event announced by Hg over the prior four weeks,
including partial realisations in IRIS, Visma and GGW resulting in c. $3.5
billion of proceeds that will be returned to Hg clients, including c. £191
million to HgT, once these transactions close in 2024.
§ Estimated £148 million invested by HgT, primarily into four new and
existing investments.
Liquid resources and commitments
§ Further £25m increase to the revolving credit facility agreed in March
2024 bringing the total facility to £375m, with the term extended to three
years, until March 2027.
§ Available liquid resources (including the credit facility increase)
post-completion of all announced transactions and the full year dividend
payable in May 2024, are £700 million (31% of 29 February pro-forma NAV).
§ Outstanding commitments of £957 million (42% of 29 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 a challenging macro environment, Hg's portfolio has demonstrated
resilient performance.
§ This has been underpinned by the underlying portfolio companies which
remain focused on selling business-critical and non-discretionary software and
services to their customers with predictable levels of recurring revenue.
§ An improving investment environment supports a likely increase in
deployment in 2024.
§ Further liquidity events are anticipated over the next twelve months.
- Ends -
HgT's 2023 Annual Report, results presentation 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)
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.
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 2023 and the publication of its annual report and
accounts for the same period, which includes the notice of Annual General
Meeting.
The objective of HgCapital Trust ('HgT') is to provide shareholders with
consistent long-term returns in excess of the FTSE All-Share Index by
investing predominantly in unquoted companies where value can be created
through strategic and operational change.
FINANCIAL AND PERFORMANCE HIGHLIGHTS
2023 performance at a glance
+11.1%
NAV per share (500.5p)
31 December 2022: +5.4%
£2.3bn
Net assets
31 December 2022: £2.1bn
+26.2%
Share price (434.5p)
31 December 2022: -15.1%
£2.0bn
Market capitalisation
31 December 2022: £1.6bn
6.5p
Full year dividend
31 December 2022: 7.0p
1.7%
Total ongoing charges
31 December 2022: 1.7%
£74m
Cash invested on behalf of HgT
31 December 2022: £527m
£324m(1)
Realisations to HgT
31 December 2022: £404m
£625m
Available liquid resources
(27% of NAV)
31 December 2022: £476m (23% of NAV)
£1.2bn
Outstanding commitments
(53% of NAV)
31 December 2022: £1.2bn (57% of NAV)
(1)Includes £91 million in relation to deferred proceeds.
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'). Please see the definitions of the APM's in the
glossary pages 117 to 118 of the full Annual Report and Accounts for the year
ended 31 December 2023.
Top 20 investments (76% of portfolio value)
A snapshot as at 31 December 2023
+25%
LTM sales growth
31 December 2022: +30%
+30%
LTM EBITDA growth
31 December 2022: +25%
26.1x
EV to EBITDA multiple
31 December 2022: 27.2x
7.4x
Net debt to EBITDA ratio
31 December 2022: 8.0x
£10.6bn
LTM revenues
31 December 2022: £9.5bn
£3.3bn
LTM EBITDA
31 December 2022: £2.8bn
31%
EBITDA margin
31 December 2022: 29%
CHAIRMAN'S STATEMENT
HgT delivered a resilient performance in 2023, successfully navigating
challenging market conditions. The portfolio maintained strong underlying
performance over the year with sales and EBITDA across the top 20 investments
(76% of the portfolio) growing at 25% and 30% respectively. Investment
activity was notably lower in the first half of 2023 than seen in previous
years, as the Manager took a cautious stance on investment activity. However,
a stabilisation in market conditions throughout the second half of the year,
supported an increase in activity for the kind of highly sought-after
companies that constitute the portfolio.
Jim Strang, Chairman, HgT
2023 was very much a year of two halves with the challenging market conditions
of 2022 remaining in evidence throughout the first half of the year.
Conditions improved during the second half, as markets stabilised and
financing conditions became more supportive for transactions, especially for
the kinds of high-quality assets with attractive market positions and growth
profiles that constitute the HgT portfolio. The portfolio, which numbered 49
businesses at the year end, traded well throughout the year, reflecting the
characteristics of the types of companies targeted for investment by Hg. Hg
continues to refine and enhance both its investment capability, notably around
the important topic of Artificial Intelligence, and in the strength of the
team globally. On the latter point, Hg recently welcomed Alan Cline, formerly
a senior partner at leading software investor, Vista Equity Partners, and
based in the USA, onto its Executive Committee. Given the discipline and
rigour of the investment approach and the health of both the portfolio and the
HgT balance sheet, the Board is cautiously optimistic for the year ahead.
I would like to draw your attention to two new initiatives the Board has taken
over the year, aimed at increasing the transparency and effectiveness of brand
marketing and communication for shareholders. Firstly, in the case of
increasing transparency, shareholders may have noticed the release of our
first preliminary trading update on 5 February 2024, which aimed to provide
shareholders with earlier guidance on the performance of HgT. Preliminary
trading updates will now be provided in respect of the interim and full year
results, after approval by the HgT Audit Valuation and Risk Committee ('AVRC')
and the Board.
Secondly, HgT has refreshed and updated its website and reporting materials as
part of a broader integrated brand marketing plan to further support open
communication with our stakeholders. This plan has also seen HgT engage with
third party marketing specialists to increase the scope and span of brand
marketing activities for HgT in the UK and overseas, where regulations permit.
Highlights in 2023 included:
• 26.2% total share price return
• 11.1% NAV per share growth on a total return basis, with net assets of
£2.3 billion
• Discount narrowed from 23% to 13%
• £74 million of new and further investments by HgT across the core
investment clusters targeted by Hg; with a further £200 million of deals
signed pending closing in 2024
• £324 million(1) in realisations to HgT, from realisation activity with
full and partial realisations at an average uplift to carrying value of 25%
• £183 million of further commitments to Hg funds
• £625 million of liquid resources available, including an undrawn
banking facility of £350 million
• £1.2 billion of outstanding commitments across the Hg fund platform to
be invested over the next three to four years
(1)Includes £91 million in relation to deferred proceeds
Performance
The NAV of HgT increased by 11.1% over the year, reflecting the ongoing
strength of the operating performance of the HgT portfolio. HgT's share price
saw a total return of 26.2% over 2023 and has seen a CAGR on a total return
basis of 17.4% p.a. over the past 20 years, outperforming the FTSE All Share
index by 10.4% p.a. over the same period.
The total net assets of HgT at 31 December 2023 were £2.3 billion, an
increase of c.£200 million over the reported figures at 31 December 2022. An
analysis of NAV movements and the underlying portfolio is set out on page 37
of the full Annual Report and Accounts for the year ended 31 December 2023.
At the end of December 2023, the HgT portfolio consisted of 49 investments,
all of which conform to the Hg sector focus and investment strategy, targeting
software and services businesses. These assets have continued to perform well
in aggregate. The underlying performance of the portfolio developed very much
in line with progress seen in recent years. The top 20 underlying companies
(76% of the portfolio) continued to deliver strong revenue growth over the
last 12 months of 25% (December 2022: 30%) and EBITDA growth of 30% (December
2022: 25%), reflecting the defensive-growth nature of the businesses in which
HgT is invested. The portfolio not only continues to generate strong top-line
growth and solid profitability, with the top 20 companies reporting an average
EBITDA margin of 31%. Currently, 98% of the portfolio by value is held above
its original cost of acquisition, a testament to the asset selection and value
creation skills of the Manager.
These businesses typically exhibit highly predictable forward cash flows and
are appropriately financed with significant covenant flexibility. The top 20
investments have seen a weighted average net debt to EBITDA ratio of 7.4x
(December 2022: 8.0x), which is consistent with the highly recurring revenues
of the businesses that make up the Hg portfolio and is typical for large, high
quality software assets in general. Given the average valuation multiple for
the portfolio is 26.1x EV-to-EBITDA, this implies that c.30% of the portfolio
is funded by leverage, which allows a significant equity cushion within the
portfolio and gives the Manager confidence that this is a prudent level of
leverage for the assets within the portfolio and consistent with similar peer
companies in the market. Hg has a dedicated capital markets team which
continually monitors and manages the capital structures of the underlying
portfolio companies to ensure they are as robust and flexible as possible in
terms of tenor, interest cost and time to maturity.
HgT aims to achieve long-term growth in the net asset value per share and in
the share price, rather than to deliver a specific dividend yield. As regards
to the 2023 financial year, HgT will pay a final dividend of 4.5 pence per
share (2022: 4.5 pence per share), payable in May 2024, bringing the full year
dividend to 6.5 pence. The Board will provide further guidance on the dividend
to shareholders, when appropriate.
Dividend: see page 114 of the full Annual Report and Accounts for the year
ended 31 December 2023.
Dividend re‑investment plan: page 114 of the full Annual Report and Accounts
for the year ended 31 December 2023.
Transaction activity over 2023 saw HgT generate material cash proceeds from
realisations at prices well in excess of the carrying value of investments.
The significant sale proceeds have been reinvested into businesses which
continue to align with the well proven Hg investment model. With a performing
portfolio, an attractive deal pipeline and a well capitalised balance sheet,
HgT is well positioned for 2024.
Jim Strang, Chairman, HgT
Investments and realisations
In order to grow the NAV of the portfolio, and to deliver returns for
shareholders, HgT operates in a continual cycle of commitments, investments
and realisations.
During 2023, HgT made further commitments to Hg funds of £183 million,
bringing total commitments to £1.2 billion which will be deployed over the
next three to four years into companies and sub-sectors that the Manager knows
well and has invested in for many years. The Board also expects further
co-investment activity (free of management fees and carried interest), in what
is anticipated to be an attractive environment for new investments. This use
of HgT's available liquid resources now will support future realisation
activity and net asset growth which, in turn, will help to maximise
shareholder returns.
Deployment activity was relatively light in 2023, with a total of £74 million
of new and further investments completed within the year, including GTreasury,
team.blue, P&I, JTL and Nomadia. Follow-on investments to finance bolt-on
M&A is an area which the Manager has highlighted as particularly
attractive in the current environment and where the sector-leading businesses
across the portfolio can further improve their market positions and product
and service offering. Further investments were announced both in late 2023 and
post the year-end and are due to close in 2024, including Visma, GGW and CINC.
On completion, these transactions will represent over £200 million of further
investment.
As I have noted in previous reports, the Hg investment model is based around
supporting portfolio companies to achieve their full potential and in creating
larger, more valuable and attractive businesses as a result, which are much
sought after in the markets they operate. Consequently, despite the
challenging market conditions, Hg was able to deliver a number of liquidity
events over the course of the year, which included the full exits of
Transporeon and Commify. In total realisations returned £324 million to HgT
with full and partial realisations generating an average uplift of 25% to
carrying value. Valuations are an area of continued focus for the Audit
Valuation and Risk Committee.
Realisation activity sets Hg apart in a year when many other private equity
firms struggled to generate liquidity from their portfolios. Hg believes its
exit activity in 2023 was a clear differentiator, highlighting the fundamental
strengths and attractiveness of the underlying portfolio to both trade and
financial buyers.
Please refer to pages 42 to 45 of the full Annual Report and Accounts for the
year ended 31 December 2023 for further information on portfolio transaction
activity.
Fundraising
Hg's success in building and creating value in the portfolio supported a new
round of fundraising which Hg successfully completed in the year.
Participating in this latest fundraising process will support HgT's long-term
NAV growth ambitions. Hg successfully raised significant capital in 2023 and
as further funds are raised, HgT continues 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 investment environment.
For further information on Hg funds, please refer to page 30 of the full
Annual Report and Accounts for the year ended 31 December 2023.
Capital Allocation
As part of the Board of HgT's commitment to shareholders, our primary
objective is to maximise investment returns through a disciplined approach to
the allocation of available liquid resources. This incorporates the continual
monitoring by the Board, working with the Manager, of forecast cash flows and
estimated returns. As I have stated in past reports, the Board continually
seeks ways to improve the effectiveness of governance. As part of this
process, in the last year, much attention has been devoted, and shareholder
feedback garnered, on the topic of capital allocation and I would like to
share the approach, framework and tools adopted as set out below.
Investments
At the core of the capital allocation policy is the imperative to continue to
drive compelling investment returns for shareholders. As you will be aware,
HgT has delivered very strong shareholder returns to investors over a period
of more than two decades, a fact recently highlighted by the AIC. The Board
seeks to maintain this long-term record by continuing to access the
repeatable returns delivered by the Hg investment platform. The single biggest
driver of long-term returns is HgT's exposure to deals completed by Hg and, as
such, the first priority of the Board is to ensure that HgT is positioned to
access these returns to the fullest extent possible, at acceptable levels of
risk.
Buybacks
From time-to-time, market conditions do create dislocations between the share
price of HgT and its stated net asset value. The Board, the Manager and HgT's
broker monitor such dislocations closely, following a clearly defined share
buyback policy. The Board has developed a process with a number of 'triggers'
set by absolute and relative level of share price discount over various time
periods. Where two or more such 'triggers' are activated, the Board is
informed and a decision is taken as to whether to allocate resources to buying
back shares. Any such buybacks are viewed with suitable caution, reflecting
the relative merits of any immediate gain with the considerable impact
utilising current cash has on long term NAV growth.
Dividends
With regard to the level of dividend payments, as I have stated in the past,
HgT's ability to pay dividends is increasingly driven by the levels of income
that are created through the activities of Hg. This is a somewhat
unpredictable exercise from one year to the next and thus the view of the
Board is to establish what it considers a reasonable basis for a 'floor' for
the dividend level which is currently set at 5 pence per share. Should
circumstances change, I will of course communicate with shareholders at the
appropriate time.
Debt facility
The final element of the capital allocation policy relates to the use of
leverage. HgT uses a Revolving Credit Facility of £350 million at the end of
2023, to support the implementation of the investment strategy. The principal
purpose of the facility is to support the programme of investment activity.
Balance sheet
A key role of the Board is continually to look to balance HgT's future
commitments to Hg funds, balance sheet and cash position, while maintaining a
clear focus on risk. This is a continuous cycle of activity which has to adapt
to unpredictable events. In the last year, HgT has invested in upgrading the
tools used to manage this process, aligning them with similar tools that Hg,
the Manager, uses to manage its own investment activity. As a result, the
Board benefits from being able to assess the various scenarios with a greater
degree of granularity which should benefit the quality of decision making.
As one of the tools used to manage the balance sheet, HgT has a revolving
credit facility to support the investment programme and to improve balance
sheet efficiency. In 2023, HgT increased its facility to £350 million, c.15%
of NAV, consistent with the historical sizing of this facility. Post the
year-end the Board has agreed to increase this to £375 million. This will aid
HgT's future cash flow management.
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.
HgT portfolio management
As I noted in the 2022 full year report and in the 2023 interim report, the
Board looks to take advantage of market driven opportunities to manage the
portfolio construction of HgT, seeking to achieve the optimal balance of asset
and vintage exposure across the various Hg fund structures.
Over 2023, HgT completed the sale of c.25% of HgT's remaining investment in
Hg's Genesis 8 Fund, delivering a return of 3.2x invested cost. This
transaction was priced at 100% of Hg Genesis 8's December 2022 NAV and
provides further strong validation of the HgT valuation policy, generating net
proceeds to HgT of just over £91 million. In April 2023, the Board and the
Manager also agreed to take advantage of the opportunity to resize HgT's
original commitment to Hg Saturn 3, reducing it by c.15%, in light of a review
of changes in the investment landscape before the final closing of the
vehicle. The transaction not only allows for significant cash to be returned
to HgT at attractive valuations, but allows for increased investment,
particularly through increased exposure to co-investments where HgT has a
stated goal of investing 10% to 15% of capital. A final benefit of these
adjustments is that they provide a mechanism to help manage the single asset
concentration in the largest individual investments in the portfolio.
Impact and responsible investment
Your Board and the Manager, Hg, continue to increase their focus on the topics
of ESG and sustainability. We share a firmly held view that not only should
the financial returns to you, the shareholders, be attractive, but these must
be delivered in a manner which is consistent with our responsibility to
society. As a technology investor, we understand the need to ensure that those
businesses in which we invest reduce their carbon footprint and contribute to
tackling climate change.
The UN Principles for Responsible Investment (UNPRI) assessment of Hg's
approach to responsible investment is 4* (82/100) for Investment Stewardship
Policy and 5* (100/100) for Private Equity, and the Board of HgT meets
regularly with the Hg Responsible Investment team to ensure that Hg's work is
well understood and endorsed by the Board. As we have previously reported, Hg
launched The Hg Foundation in 2020 - a charitable initiative to provide
funding and operational support to initiatives across Europe, the UK and the
US. The Hg Foundation's goal is to have an impact on the development of those
skills and learning most required for employment within the technology
industry, focusing on individuals who might otherwise experience barriers to
access this education. This Foundation is funded by the Hg management company
and its team members.
Responsible Investment:
see pages 32 to 33 of the Manager's Review of the full Annual Report and
Accounts for the year ended 31 December 2023.
The Hg Foundation:
see page 33 of the Manager's Review of the full Annual Report and Accounts for
the year ended 31 December 2023.
Board and governance
As I noted in my previous statement, HgT embarked on a process to find a new
Non-Executive Director to replace Anne West, who will not be standing for
re-election to the Board at the AGM in May 2024, after ten years of service.
On behalf of the Board, I would like to extend special thanks to Anne as she
steps down. Anne has made a very significant contribution to HgT over her ten
years on the Board and we thank her for her all her efforts on behalf of HgT.
As we announced at the end of last year, our Board colleague, Guy Wakeley,
announced his decision to step down from the Board. On behalf of myself and my
fellow Directors, I would also like to thank Guy for his important
contribution to HgT throughout his time on the Board, which has benefited from
his experience in listed companies, governance and especially in risk.
With Guy's departure, we have begun the process to find a new Non-Executive
Director and an external search firm has been engaged to support the
Nomination Committee and the Board in delivering a successful outcome to this
process, noting the skills and experience which would be most additive to HgT.
Any announcements regarding this process will be made in due course.
In November 2023, HgT was pleased to announce the appointment of Helena Coles
as a Director to the Board. Helena has over 20 years of investment experience,
has considerable expertise in ESG, gained through the perspectives of an asset
owner, fund manager, as well as UK regulator, and co-founded and built a
successful fund management firm with peak AUM of over $10bn. We are delighted
to welcome Helena to the Board and look forward to her insightful
contributions.
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. We have now used this tool for two years to
provide instant feedback after each Board meeting and also to support the two
annual Board review cycles. I am pleased to say that the results of the annual
review process revealed the HgT Board to be amongst the highest scoring Boards
on the platform, with a marginally higher overall score this year than last,
in the 90th percentile against peers.
Nomination Committee report see page 104 of the corporate governance section
of the full Annual Report and Accounts for the year ended 31 December 2023.
Prospects
HgT has delivered a resilient performance over 2023, with the underlying
portfolio continuing to deliver strong growth. Investment activity was slower
in the first half of the year as the prevailing high degree of uncertainty and
tight capital markets conditions combined to make transactions challenging.
However, this activity accelerated in the second half of the year and into
2024, as conditions improved and as the market looked favourably on the kinds
of high-quality assets that make up the HgT portfolio.
The significant liquidity generated in the period, not only validates the
market value of the assets in the portfolio, but further strengthens the
balance sheet to be able to capitalise on future opportunities as they present
themselves. With our defensive portfolio of companies and prudent management
of the balance sheet, HgT is well positioned to take advantage of investment
opportunities as they arise, and the Board remains positive for both
transaction activity and portfolio performance in the year ahead.
Jim Strang, Chairman, 8 March 2024
MANAGER'S UPDATE
In a world of rising labour costs, freeing up people for high value tasks is
of material economic benefit to businesses, especially during the recent
period of elevated inflation.
David Toms, Head of Research, Hg
The second half of 2023 saw a rapid improvement in investor sentiment in
public markets, particularly with reference to software and services
businesses. Our suggestion at the Interims that we thought it would be 'brave'
to extrapolate the first half's strong multiple progression into the second
half of the year was partially correct, as multiple expansion slowed
significantly in H2 but still ended the year ahead of June levels, and well
ahead of December 2022. By the end of 2023, much of the 2022 decline in
multiples had been reversed, and once we incorporate the benefits of earnings
growth, the largest software and services index closed 2023 at all-time highs.
As we have previously commented, our valuation methodology attenuates the
volatility of public markets by including private comparables, which are often
more representative of the price paid for full control, rather than the
marginal price of trading a share. As a result, our multiples are generally
more stable than public multiples; this was the case during 2022 (when our
multiples saw less of a decline) and 2023 (when we didn't have the same
'trough' to rebound from). If we look across the whole two year period, our
multiples have moved in a similar range to the largest public software index,
and our NAV has outperformed by 6%, driven largely by our superior earnings
growth.
Our expectation of a strong first half to 'sustain in the second half' proved
correct, and the software and services sector in fact saw an acceleration in
forecast earnings growth in the second half. Through 2023 there was also a
strong trend of software and services companies reporting 'stabilisation' in
their earnings calls, vs. 2022's frequent reports of 'macro headwinds'.
The portfolio has seen less volatility than public markets, and our organic
EBITDA growth has materially outperformed public peers - both the broad
market, and software and services focused businesses. When we compare the
performance with these peer groups, we can see both the attraction of software
and services with its steadier growth, and the relative outperformance of our
portfolio, against a publicly listed portfolio from the sector.
The excitement around Generative AI during the year, highlights the value in
automating complex workflow. We've previously commented on the ability of our
portfolio and our industry to drive productivity in complex tasks. In a world
of rising labour costs, freeing up people for high value tasks is of material
economic benefit to businesses, and we saw the impact of this during the
recent period of elevated inflation. Although inflation is declining, there is
clear evidence that labour shortages will be a long-term structural issue for
decades to come. We expect this to underpin continued robust growth in the
demand for automation.
In the short term, although our trading (earnings) performance is well ahead
of publicly listed peers, our portfolio value has lagged its public peers
during 2023. This reflects much less aggressive multiple expansion in our
valuation models, versus that experienced in the public markets. No doubt the
debate about who is 'right' when it comes to valuations will persist, but from
our perspective, when we see public company multiples double or halve in a
matter of months, based on very limited (and sometimes no) changes to
underlying earnings forecasts, we are not convinced this always forms the
correct frame of reference for 'right'.
As we have previously indicated, in any quarter, there are two main factors
influencing our valuations:
• Valuation change in public comparators, of which we, very broadly, see
around half the impact in any one quarter. Our valuation model is driven
partly by such inputs, but also by less volatile, longer-term M&A
comparables in the public and private markets.
• Growth in earnings. Our companies have typically grown their EBITDA
historically by 10-15% organically each year, i.e. c.3% each quarter, and
approximately double this on an 'all in' basis including M&A.
The relative pace of both movements (rating changes can be relatively rapid;
earnings growth tends to be much steadier) dictates movements in any one
quarter, but over time, earnings growth tends to dominate.
Looking to 2024, we would be very surprised to see a repeat of 2023's multiple
expansion. However, in our view, when set against the broader market context,
software does not feel overly exposed at present, particularly given the
stability of its growth and the long-term opportunities; we expect robust
organic earnings growth (the ultimate long-term driver of value) to
continue.
In our view, sector sentiment is likely to be underpinned by a modestly
improving economic backdrop - we have already seen signs of this in early
earnings reports, and the sector has got off to a strong start in 2024 both
from the perspective of multiples and earnings. Beyond this, for our
portfolio, M&A remains a key driver of outperformance and we continue to
execute on a strong set of opportunities.
We have prioritised returning cash, whilst continuing to back businesses that
we believe can produce enduring growth.
Luke Finch, Head of Client Services, Hg
Activity levels
As previously stated, in any rolling 12-month period, the investment teams
across Hg look to make between 8 and 16 new platform investments in total
across the active Hg Saturn, Hg Genesis and Hg Mercury funds, and we also seek
to deliver similar numbers of liquidity events (sales or partial sales of
investments and refinancings) each year. We believe the pace of investment
should continue at broadly this level over the medium term. Activity at Hg's
Investment Committee accelerated in the second half of 2023 and we think
provides a good leading indicator of activity levels in 2024.
M&A activity within the existing portfolio remains high. From any new
investments we make, there is a further flow of M&A opportunities, adding
to the breadth and depth of our organic development, and catalysing cross
sales to existing and acquired customers. The strength of portfolio M&A
reflects a more liquid and attractive pricing environment for these, typically
smaller, opportunities. We have previously indicated a run-rate of somewhere
in excess of 100 such acquisitions a year, and we are running at over twice
that rate at present. The valuations for such investments tend to be around
half the level of the platform companies that are acquiring them, providing an
attractive source of enhanced returns.
To give a further sense of scale, the combined enterprise value of the
businesses within Hg's portfolio now totals to over $130 billion at 31
December 2023.
OVERVIEW OF THE UNDERLYING INVESTMENTS
held through HgT's limited partnerships
Investments Fund Sector Location Year(1) Residual Total Portfolio Cum.
(in order of value) cost valuation(2) value Value
£000 £000 % %
1 Access S3/G8/HGT ERP & Payroll UK 2020 145,255 304,200 12.3 12.3
2 Visma G7/S1/S2/HGT Tax & Accounting/ERP & Payroll Scandinavia 2020 81,123 216,048 8.7 21.0
3 IFS Workwave S3/HGT ERP & Payroll Scandinavia 2022 114,248 123,989 5.0 26.0
4 Howden S3/HGT Insurance UK 2021 59,553 123,525 5.0 31.0
5 Litera G8/G9 Legal & Regulatory Compliance N.America 2019 28,919 110,826 4.5 35.5
6 Septeo G9 Legal & Regulatory Compliance France 2020 53,671 105,259 4.2 39.7
7 IRIS S1 Tax & Accounting/ERP & Payroll UK 2018 36,380 98,563 4.0 43.7
8 Ideagen G10/G9/M3 Legal & Regulatory Compliance UK 2022 68,257 93,496 3.8 47.5
9 GGW M2/M3 Insurance Germany 2020 19,019 92,149 3.7 51.2
10 P&I S1/HGT ERP & Payroll Germany 2020 53,376 84,929 3.4 54.6
11 FE fundinfo M2/G9 Fintech UK 2017 26,154 77,841 3.1 57.7
12 insightsoftware S2/HGT Tax & Accounting N.America 2021 53,056 74,427 3.0 60.7
13 team.blue G10/G8 Tech Services Benelux 2018 36,861 69,703 2.8 63.5
14 Sovos S2/HGT Tax & Accounting N.America 2020 49,593 58,678 2.4 65.9
15 Argus Media S1/HGT Fintech UK 2020 24,183 49,893 2.0 67.9
16 Norstella M2/G9/HGT Healthcare IT N.America 2021 29,274 48,289 1.9 69.8
17 Trackunit G9 Automation & Engineering Scandinavia 2021 26,593 46,566 1.9 71.7
18 Waystone S2 Legal & Regulatory Compliance UK 2022 40,904 39,430 1.6 73.3
19 Citation G8 Tech Services UK 2020 18,890 39,227 1.6 74.9
20 Benevity S2/HGT ERP & Payroll N.America 2021 32,124 39,176 1.6 76.5
21 Rhapsody M2/M3/HGT Healthcare IT N.America 2018 20,814 38,786 1.6 78.1
22 Gen II G9 Fintech N.America 2020 19,921 35,935 1.4 79.5
23 Prophix G9 Tax & Accounting N.America 2021 17,139 35,296 1.4 80.9
24 Caseware G8 Tax & Accounting N.America 2020 21,255 34,746 1.4 82.3
25 MeinAuto G8 Automation & Engineering Germany 2017 25,233 33,993 1.4 83.7
26 Azets G7/HGT Tax & Accounting UK 2016 20,966 33,545 1.4 85.1
27 TeamSystem G8 Tax & Accounting/ERP & Payroll Italy 2021 10,586 31,897 1.3 86.4
28 HHA G9 Healthcare IT N.America 2021 24,035 30,994 1.2 87.6
29 Project CH S2 Tax & Accounting Germany 2021 18,393 29,563 1.2 88.8
30 smartTrade M2/HGT Fintech France 2020 18,862 27,263 1.1 89.9
31 DEXT S1/HGT Tax & Accounting UK 2021 15,620 25,954 1.0 90.9
32 LucaNet G9 Tax & Accounting Germany 2022 15,649 24,226 1.0 91.9
33 Nitrogen M3/HGT Fintech N.America 2021 15,868 20,045 0.8 92.7
34 Intelerad G8 Healthcare IT N.America 2020 11,870 17,360 0.7 93.4
35 Pirum M3/HGT Fintech UK 2022 13,928 16,998 0.7 94.1
36 F24 M2/HGT Tech Services Germany 2020 11,291 16,630 0.7 94.8
37 GTreasury M4/HGT Tax & Accounting N.America 2023 15,008 16,126 0.6 95.4
38 Auvesy M3 Automation & Engineering Germany 2021 8,130 15,142 0.6 96.0
39 Geomatikk M2/HGT Tech Services Scandinavia 2021 11,392 15,002 0.6 96.6
40 Mitratech G7/HGT Legal & Regulatory Compliance N.America 2017 3,328 13,722 0.6 97.2
41 Fonds Finanz M3 Insurance Germany 2022 8,309 12,905 0.5 97.7
42 Revalize G9 ERP & Payroll N.America 2021 18,839 11,759 0.5 98.2
43 TrustQuay M3 Fintech UK 2022 8,970 10,999 0.4 98.6
44 Serrala G9 Tax & Accounting Germany 2021 23,086 10,569 0.4 99.0
45 Bright M3 ERP & Payroll Ireland 2021 6,529 10,165 0.4 99.4
46 JTL M4 ERP & Payroll Germany 2023 7,559 7,667 0.3 99.7
47 NomadIA M3 ERP & Payroll France 2023 6,014 6,980 0.3 100.0
48 Blinqx M3 ERP & Payroll Benelux 2022 3,833 5,542 0.2 100.2
49 Silverfin M2/HGT Tax & Accounting Benelux 2019 1,132 4,692 0.2 100.4
Total buyout investments (49) 1,400,992 2,490,715 100.4 100.4
Other Hedges and other fund interests 13,539 (8,867) (0.4) (0.4)
Total all investments 1,414,531 2,481,848 100.0 100.0
(1) Where re-investment has occurred the investment date is based on the
closing of the largest tranche of the investment holding.
(2) Including accrued income of £130.8 million, but before a deduction for
the provision for carried interest of £211.4 million and fund level
facilities of £355.8 million. Note that the investments held at fair within
the Balance Sheet on page 57 of the full Annual Report and Accounts for the
year ended 31 December 2023 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 2023 is
4.5 pence per share (following the interim dividend of 2.0 pence, bringing the
full year dividend to 6.5 pence per share).
Ex-dividend date 21 March 2024
(date from which shares are transferred without dividend)
Record date 22 March 2024
(last date for registering transfers to receive the dividend)
Last date for registering DRIP instructions (see below) 29 April 2024
Dividend payment date 21 May 2024
NOTICE OF ANNUAL GENERAL MEETING
The Annual General Meeting of the Company will be held on Thursday, 16 May
2024 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 119 to 125 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 2023 (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
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