REG - HG Capital Trust PLC - Interim Report and Accounts <Origin Href="QuoteRef">HGT.L</Origin> - Part 2
11/09/2017 07:06
- Part 2: For the preceding part double click ID:nRSK2902Qa
industrial businesses,
many of which have strong national or international positions in a specific
niche sector, with the opportunity to achieve further scale. Our thematic
research within this sector has been concentrated over many years on the
characteristics that define a strong industrial investment. As a result, we
have developed certain themes that we regard as particularly attractive:
aftermarket companies; product champions/niche manufacturers; c-part
specialists; and smart distribution models. These themes are overlaid with
specific industrial sub-sectors where we have a strong understanding.
CASE STUDY - ZENITH
Website: www.zenith.co.uk
Sector: Services
Geography: UK
________________________________________________________________________________________
"Zenith and HgCapital enjoyed a successful partnership over the last three
years with a shared vision on creating value. We look forward to continuing
our growth story from these foundations."
Tim Buchan, CEO of Zenith
_________________________________________________________________________________________
Business description
Zenith is the largest independent vehicle leasing business in the UK.
HgCapital formed the Group in March 2014 through the merger of Zenith Vehicle
Contracts and the Leasedrive Group, which were combined to create Zenith
Leasedrive Holdings, under the leadership of Zenith's CEO, Tim Buchan.
Following the successful completion of the integration, the business rebranded
to Zenith.
Headquartered in Leeds, with full-service operations in both Solihull and
Wokingham, Zenith has over 500 employees and provides end-to-end automotive
solutions focused on contract hire, salary sacrifice, fleet management and
short-term hire services to customers across the UK. The company operates a
fleet of c. 85,000 vehicles and focuses on serving blue-chip customers,
principally as sole supplier. Zenith was recently ranked 7th in the Fleet News
50's list of the UK's top 50 contract hire companies.
The investment
HgCapital initially invested in Leasedrive in December 2013, subsequently
completing the merger with Zenith in February 2014. The investment team
identified the opportunity to merge Zenith and Leasedrive and create a
strategically valuable asset in the UK contract hire and salary sacrifice
market, by becoming the leading independent provider in the market.
Furthermore, the potential to generate significant synergies through platform
integration and economies of scale made the case for merging the two
complementary businesses even stronger.
Zenith was identified as the platform from which to build a combined entity
due to its clearly differentiated service proposition through market-leading
Net Promoter Scores, its unique technology proposition (Pulse) and proven
management team.
The investment case
Zenith displayed many of the characteristics HgCapital looks for in its
portfolio companies: offering business-essential services to a loyal and
satisfied customer base on long-term contracts. The business enjoys high
customer loyalty and continues consistently to win many new customers,
providing good visibility on revenue growth (95% visibility on next year's
revenue outlook). These characteristics drive strong core profitability (60%+
EBITDA margins) aligned with double-digit growth and high cash flow conversion
(100%+).
The UK's contract hire market is very large (more than 1 million contracted
vehicles) with multiple competitors, many of whom are sub-scale. Despite low
single digit market growth, Zenith has been able to grow organically at over
10% p.a. driven by its relentless focus on customer service levels, enabled by
its proprietary technology platform (Pulse).
The investment team also identified more than £10 million of synergies
available from the merger of the two businesses through integrating the
existing platforms, leveraging scale benefits from the combined supply chain
and enhancing profitability by reducing asset financing costs.
How HgCapital has supported Zenith
HgCapital worked together with management to identify the synergies available
from the merger of Zenith and Leasedrive. The process to integrate the two
businesses was led by management with support from our portfolio team and was
delivered successfully achieving the full synergies, whilst minimising any
potential customer disruption (no customers were lost due to the integration)
and maintaining the company's position in the Sunday Times best 100 companies
to work for.
In April 2015, Zenith was refinanced on the back of its strong trading
performance, returning 45% of the original investment made to clients.
Following this, in June 2015, Zenith agreed a new securitisation facility with
improved terms.
Following on from substantial involvement in the integration planning and
implementation process, HgCapital's portfolio team have worked on several
value creation initiatives, including market segmentation and strategy
reviews, improving digital presence and enhancing supply chain savings.
The enlarged scale of the business has provided multiple opportunities to
improve the efficiency of both acquisition financing and asset-based funding,
where we supported management by using our debt financing expertise and
relationships.
Performance improvement
A substantial part of the value created during HgCapital's investment period
has been driven by the close collaboration of Zenith's management and the
HgCapital team to drive organic revenue growth through higher levels of
customer loyalty and strong new business growth, whilst also delivering on the
integration plan to deliver over £10 million of synergies.
As a result, Zenith has continued to deliver strong double-digit revenue and
EBITDA growth (13% and 20% CAGR respectively since March 2014) and the
contracted nature of its business model means that a significant proportion of
future growth is already underpinned by existing customer contracts.
Exit and refinancing
In March 2017, HgCapital completed the sale of Zenith to Bridgepoint in a
transaction totalling £750 million at an uplift to book value of 23%. The
combined return (including the 2015 refinancing) delivered a 2.9x investment
multiple and a 46% gross IRR over the investment period.
Investment return multiple of cost: 2.9x
Gross IRR: 46% p.a.
TIMELINE
1989
Zenith founded with eight employees
2007
MBO backed by Barclays PE
2008
Acquisition of Provecta
2008
Zenith launched its salary sacrifice offering - one of the first to what was a
nascent market at that time
2010
MBO backed by Morgan Stanley Private Equity
2011
Launched Pulse, Zenith's award-winning fleet management platform which is used
to generate >300k automated reports for over 100 clients each year
2011
Established a conduit securitisation, arranged by HSBC, to further diversify
its funding mix. This was renegotiated in 2015, post-merger, with improved
terms to benefit from the increased scale
2012/13
Wins the Fleet News 'Leasing Company of the Year' award two years in a row
2014
MBO by HgCapital and merger with Leasedrive to form Zenith Leasedrive
2014
Zenith enters Sunday Times top 100 companies to work for, for the first time
(and has been in it every year since)
2015
Launch of Pan-European Auto Alliance
2015
Launched Accelerate, a bespoke in-house case management system to help
standardise customer service workflows and provide useful insights and tools
to improve the customer experience
2016
Wins UK's largest salary sacrifice scheme with Royal Mail
OVERVIEW OF THE PERIOD
NET ASSET VALUE (NAV)
Over the first half of 2017, the NAV of the Company increased by £55 million,
from £616 million to £671 million at 30 June 2017.
ATTRIBUTION ANALYSIS OF CURRENT PERIOD MOVEMENTS IN NAV
Revenue£'000 Capital£'000 Total£'000
Opening NAV as at 1 January 2017 37,156 578,600 615,756
Realised capital and income proceeds from investment portfolio in excess of 31 December 2016 book value 1,812 19,937 21,749
Net unrealised capital and income appreciation of investment portfolio 9,657 61,124 70,781
Net realised and unrealised gains from liquid resources 395 (15) 380
Dividend paid (17,169) - (17,169)
Expenditure (1,900) - (1,900)
Taxation (18) - (18)
Investment management costs:
Priority profit share - current period charge (3,417) - (3,417)
Priority profit share - net loan allocation (510) 510 -
Carried interest - current period provision - (15,310) (15,310)
Closing NAV as at 30 June 2017 26,006 644,846 670,852
There were a number of underlying factors contributing to the increase in the
NAV over the period. Positive impacts on the NAV were the £71 million
revaluation of the unquoted portfolio and uplifts of £22 million on the
realisation of investments compared with their carrying value at the start of
the year.
Reductions in the NAV included: the payment of a £17 million dividend to
shareholders and HgCapital's remuneration (£3 million and a £15 million
increase in the provision for future carried interest).
REALISED AND UNREALISED MOVEMENTS IN INVESTMENT PORTFOLIO
for the period ended 30 June 2017
Investment name and ranking by value within investment portfolio at 30 June 2017 Net realised and unrealised appreciation/(depreciation) of investments £'million
Visma (1) 30.9
Hg Mercury 15.1
Zenith (sold) 10.9
IRIS (2) 10.7
QUNDIS (sold) 10.0
Parts Alliance (sold) 6.5
Ullink (10) 4.3
The Foundry (12) 3.6
Teufel (25) 3.5
Renewable energy 2.7
A-Plan (9) 2.4
Hg6E 2.0
Other 1.8
CogitalGroup (5) 1.7
JLA (4) 1.5
Raet (11) 1.4
Sovos Compliance (3) 1.2
Kinapse (27) (3.8)
Frösunda (28) (5.4)
Radius (14) (8.5)
During the period, the value of the unrealised portfolio decreased by £1
million, excluding the provision for carried interest. There were significant
positive movements from strong trading (£51 million) and increased ratings
(£14 million). This was offset by realisations at carrying value net of
acquisitions (£72 million).
TOP 20 PORTFOLIO TRADING PERFORMANCE
as at 30 June 2017
The top 20 buyout investments (representing 82% of the total portfolio by
value) have delivered strong sales growth of 11% and EBITDA growth of 19% over
the last twelve months ('LTM').
This demonstrates consistent robust growth in the portfolio with revenues and
EBITDA growing on average by 11% p.a. and 17% p.a. respectively over the last
three years. The business model characteristics of these companies give us
confidence that this double-digit growth can be achieved consistently going
forward.
More than 70% of the portfolio is seeing strong double-digit revenue growth,
and 80% of the portfolio has delivered double-digit EBITDA growth over the
last twelve months.
Profits across the portfolio have grown at a faster rate than revenues.
Investment made over the last few years into the cost base of a number of our
companies for example, to finance increased sales and marketing capabilities,
strengthen management and new product development, continues to bear fruit.
We continue to see very robust and consistent double-digit trading performance
from Visma, IRIS, Sovos Compliance, Ullink, Allocate Software and Sequel
Business Solutions in the TMT portfolio, and A-Plan, CogitalGroup and Citation
in the Services sector.
Whilst new to the portfolio, Mitratech and Esendex have seen a good start to
their life with HgCapital.
In June 2017, we took the decision to write down one of our top 20
investments, Radius, and in addition, Frösunda and Kinapse whose operational
performance has been below expectations over the period.
Overall, continued strong earnings growth and cash generation across the
portfolio continues to drive equity value in our investments.
VALUATION AND GEARING ANALYSIS
as at 30 June 2017
The portfolio's valuation policy is applied consistently, in accordance with
the IPEV Valuation Guidelines. Each company has been valued individually,
resulting in an average EBITDA multiple for the top 20 buyout investments of
16.0x (14.2x at 31 December 2016).
We continue to take a considered and prudent approach in determining the level
of maintainable earnings to use in each valuation. The majority of the
portfolio is valued using the LTM earnings to 31 May 2017, unless we have
anticipated that the outlook for the full current financial year is likely to
be lower, in which case we have used forecast earnings. In selecting an
appropriate multiple to apply to a company's earnings, we look at a basket of
comparable companies, primarily from the quoted sector, but where relevant and
recent, we will also use M&A data.
Four of the top 20 companies (representing 52% by value) are valued at a
multiple of over 16x (Sovos Compliance, IRIS, Visma and Mitratech). All have
attractive business models, are growing strongly and generating cash, and are
in demand from investors.
There remains a continued shift in the mix of the portfolio to higher growth
businesses, in particular in the TMT sector, where we hold a number of
companies with substantial opportunities to grow their SaaS business.
Our portfolio companies make appropriate use of gearing, with an average for
the top 20 of 5.0x LTM EBITDA. Many of our businesses have highly predictable,
strong earnings growth and are very cash generative, enabling us to use debt
to gear our returns. Over the first six months of 2017 we have taken the
opportunity to refinance Visma, A-Plan and Ullink as detailed below.
The first six months of 2017 continued to see significant increases in
valuations in the portfolio. These were primarily driven by strong trading
performance in the underlying portfolio.
OUTSTANDING COMMITMENTS OF THE COMPANY
The period ended with liquid resources of £119 million, supported by an
undrawn bank facility of £80 million. Outstanding commitments as at 30 June
2017 were £478 million, as listed below. We anticipate that the majority of
these outstanding commitments will be drawn down progressively over the next
four to five years and are likely to be partly financed by future cash flows
from portfolio realisations. Additionally, to mitigate the risk of being
unable to fund any draw-down under its commitments, the Board has negotiated a
right to opt out, without penalty, of the Company's obligation to fund such
commitments where certain conditions exist.
Fund Fundvintage Original Outstanding commitments as at 30 June 2017 Outstanding commitments as at 31 December 2016
commitment£'million
£'million % of NAV £'million % of NAV
HGT 8 LP1 2017 350.0 350.0 52.2% 350.0 56.9%
Hg Mercury 22 2017 80.0 80.0 11.9% - -
HGT 7 LP 2013 200.0 22.4 3.3% 39.8 6.5%
HGT 6 LP 2009 285.0 12.6 1.9% 11.0 1.8%
RPP2 2010 35.13 6.1 0.9% 7.5 1.2%
Hg Mercury 2011 60.0 3.8 0.6% 10.3 1.7%
HGT LP (Pre-HgCapital 6 vintage) pre-2009 120.04 1.3 0.2% 1.3 0.2%
Hg6E6 2009 15.0 1.0 0.1% 0.6 0.1%
RPP1 2006 19.05 0.8 0.1% 0.8 0.1%
Total 478.0 71.2% 421.3 68.5%
Liquid resources 119.4 17.8% 45.8 7.4%
Net outstanding commitments unfunded by liquid resources 358.6 53.4% 375.5 61.1%
1 Commitment to HgCapital 8 in December 2016. This fund will only
commence investing once HgCapital 7 has completed its investment period.2
Commitment to Hg Mercury 2 in February 2017. This fund will only
commence investing once Hg Mercury 1 has completed its investment
period.3 Sterling equivalent of E40.0 million. 4 Excluding any co
-investment participations made through HGT LP. 5 Sterling equivalent of
E21.6 million.6 Partnership interest acquired during 2011.
COMMITMENTS AT 30 JUNE 2017 - REMAINING INVESTMENT PERIOD
£21.8 million - Investment period completed, remaining funds for follow-on
investment.
£26.2 million - Funds coming towards the end of their investment period.
£430.0 million - HgCapital 8 and Mercury 2 commitment. These funds will only
commence investing once HgCapital 7 and Mercury 1 have completed investing.
The Company's commitment will be drawn down over four to five years.
£478.0 million - Total
INVESTMENT PORTFOLIO OF THE COMPANY
Fund limited partnerships Residualcost£'000 Totalvaluation£'000 Portfoliovalue%
Primary buyout funds:
1 HGT 6 LP 121,183 213,415 38.4%
HGT 6 LP - Provision for carried interest - (46,475) (8.4%)
2 HGT 7 LP 146,272 211,931 38.1%
HGT 7 LP - Provision for carried interest - (15,947) (2.9%)
3 HGT LP 69,044 95,490 17.2%
4 HgCapital Mercury D LP 44,361 74,064 13.3%
HgCapital Mercury D LP - Provision for carried interest - (6,751) (1.2%)
Total primary buyout funds 380,860 525,727 94.5%
Secondary buyout funds:
5 HgCapital 6 E LP - 10,505 1.9%
HgCapital 6 E LP - Provision for carried interest - (2,419) (0.4%)
Total secondary buyout funds - 8,086 1.5%
Total buyout funds 380,860 533,813 96.0%
Renewable energy funds:
6 RPP2 Fund 26,198 21,363 3.8%
7 RPP1 Fund 4,803 1,013 0.2%
Total renewable energy funds 31,001 22,376 4.0%
Total investments net of carried interest provision 411,861 556,189 100.0%
PORTFOLIO ANALYSIS
Sector by value* of primary buyout portfolio
75% TMT
21% Services
2% Industrials
2% Healthcare
Investment vintage by value* of primary buyout portfolio
5% 2017
24% 2016
9% 2015
26% 2014
5% 2013
31% pre 2013
Geographic spread by value* of primary buyout portfolio
49% UK
20% Scandinavia
14% Other Europe
11% North America
6% Germany
Analysis by value* of investment return relative to its original cost
87% Above
13% Below
Representing aggregate realised proceeds and unrealised valuations of an
investment
*Excluding carried interest provision
INVESTMENTS
Over the period, £264 million was invested on behalf of our clients, with the
Company's share being £40 million.
The vast majority of our investments are generated by establishing and
developing relationships with companies in our chosen segments over the longer
term and typically pursuing opportunities where we have a strong relationship
with a founder or management team. By doing this, we believe that we can
invest in the very best businesses within our chosen sub-sectors.
We continue to look for businesses that share similar underlying business
model characteristics such as: high levels of recurring revenues; a product or
service that is business critical but typically low spend; low customer
concentration; and low sensitivity to market cycles. This is a theme that runs
through many of our new investments and we believe companies with these
characteristics will remain in high demand.
During the first half of 2017, the Company has invested £11.5 million
(Mitratech and Esendex) by way of co-investment, in addition to its commitment
to invest alongside HgCapital 7 and HgCapital Mercury 1. This is an attractive
way to invest more funds, when available, with no fees or carried interest
being payable.
NEW INVESTMENTS
Mitratech
Mitratech is a leading global provider of legal, risk and compliance software
serving multinationals and SMEs across Europe and the US.
This investment by the TMT team follows many years of experience in the
regulatory-driven business software space. Mitratech demonstrates many of the
business model characteristics that HgCapital looks for, including: a
business-critical product; a high proportion of repeatable revenues; strong
customer loyalty; an opportunity for M&A; and a strong management team with a
proven track record in both organic and M&A-led growth.
fundinfo
fundinfo is a leading technology platform for fund data and documents
publication and dissemination to the global fund management industry
(including banks, insurance companies, financial advisors, family offices and
platforms), headquartered in Zurich, Switzerland.
fundinfo will join HgCapital's current network of European headquartered
FinTech investments, including Intelliflo (SaaS financial advisor software),
Ullink (connectivity and trading software) and Sequel (insurance software and
analytics).
Gentrack
Gentrack is a is a publicly listed developer of specialist software for energy
utilities, water utilities and airports around the world. The investment in
Gentrack helped finance the acquisition of Junifer Systems, a leading provider
of utilities software in the UK. The combined product offering of Gentrack and
Junifer is well positioned for growth, capitalising on the growing market
share of independent energy retailers, the UK smart metering roll-out, and
retail competition in water for commercial and industrial consumers. Gentrack
also intends to take Junifer's product offering into other geographic markets
as a solution for new entrants and SME retailers.
FURTHER INVESTMENT
Esendex
Esendex is a leading provider of mission-critical business messaging services
across Europe and represents a further investment into the Technology
Infrastructure cluster. On completion of the transaction Esendex was merged
with an existing Mercury portfolio company, Mobyt, which provides similar
business messaging solutions in Italy and France. Esendex demonstrates many of
the business model characteristics that HgCapital looks for, including: a high
proportion of recurring revenues from serving a large fragmented base of SMEs,
delivering an operationally critical service and the opportunity to back a
strong management team.
FURTHER INVESTMENT SINCE THE PERIOD-END
Visma
In June, HgCapital announced a further investment in Visma, a leading provider
of mission-critical business software to SMEs in the Nordic region, following
a decision by KKR to sell its holding in the group. HgCapital is the lead
investor in the new transaction structure which valued the business at NOK 45
billion (£4.2 billion), the largest ever software buyout in Europe. The
Company will contribute a total of £13.2 million to this investment.
In 2002, HgCapital's TMT team identified regulatory-driven, subscription-based
software as an attractive sub-sector with scope for considerable growth over
the following decade. HgCapital has made more than twelve investments in this
space over the last fifteen years and more than 150 bolt-on acquisitions over
this same period. In total, HgCapital has made 37 software TMT investments and
over 200 bolt-on software acquisitions since 2002, making the firm comfortably
the most active European TMT investor over this period.
REALISATIONS
Over the first six months of 2017, HgCapital has returned a total of £872
million to its clients, including £134 million to the Company.
It was a very active period for realisations. We have made several references
to 'frothy' markets over the past year and this has helped inform our approach
to selling investments, whilst also carefully considering our appetite for
selling versus the benefits of remaining invested in selected businesses for
longer.
We have also taken advantage of buoyant debt markets during the period by
refinancing investments where we have good visibility of their future
earnings, returning cash proceeds to our clients, including the Company, and
we will continue to assess further opportunities here.
EXITS
Zenith
In March 2017, we completed the sale of Zenith, the largest independent
vehicle leasing business in the UK, to Bridgepoint in a transaction totalling
£750 million. This transaction delivered a 2.9x investment multiple and a 46%
gross IRR over the investment period.
The sale of Zenith resulted in an uplift of 23% over the carrying value of the
investment at 31 December 2016.
A case study of this investment appears above.
QUNDIS
In May 2017, the Munich team completed the sale of QUNDIS, a leading provider
of sub-metering solutions in Europe, to a German investment group, KALORIMETA,
a leading service provider of climate-intelligent solutions in the buildings
sector, for a total enterprise value of c. E400 million. This transaction
delivered a 3.5x investment multiple and a c. 30% gross IRR over the
investment period, with HgCapital retaining a minority position in the
combined group.
The sale of QUNDIS resulted in an uplift of 29% over the carrying value of the
investment at 31 December 2016.
Zitcom
In June 2017, the Mercury team completed the sale of Zitcom, a Danish hosting
and cloud solutions provider operating in the SME segment, to Intelligent, a
Belgian headquartered provider of hosting services. This transaction delivered
a 3.3x investment multiple and a 141% gross IRR over the investment period.
The sale of Zitcom resulted in an uplift of 105% over the carrying value of
the investment at 31 December 2016.
REFINANCINGS
Visma
In April 2017, the TMT team completed the refinancing of Visma, a leading
provider of mission-critical software to SMEs in Scandinavia, returning
proceeds of £52.2 million to clients, including £12.9 million to the Company.
This represents a 32% return on the original investment made in 2014.
A-Plan
In March 2017, the Services team completed the refinancing of A-Plan, a UK
based distributor of motor and household insurance policies to SMEs and
individuals. This returned £52.3 million to clients, including £5.2 million to
the Company, representing a 35% return on the original investment made in
2015.
Ullink
In May 2017, the TMT team completed the refinancing of Ullink, a global
provider of electronic trading applications and connectivity to the financial
community. On completion, this returned £43.8 million to HgCapital clients,
including £4.3 million to the Company, representing a 43% return on the
original investment made in 2014.
REALISATIONS SINCE THE PERIOD-END
Parts Alliance
In June, HgCapital announced that it had agreed the sale of Parts Alliance, a
UK automotive aftermarket parts distributor, to Uni-Select Inc., a listed
Canadian distributor of automotive refinish and industrial paint products and
aftermarket parts. The transaction had a value of £205 million, and delivers a
2.0x investment multiple and a 19% gross IRR over the investment period.
The sale of Parts Alliance returned £21.1 million to the Company and resulted
in an uplift of 46% over the carrying value of the investment at 31 December
2016.
e-conomic
In June, we announced that the TMT team had agreed the sale of HgCapital 6
Fund's investment in e-conomic to Montagu and ICG, realising additional
proceeds of c. £223 million to clients, including c. £33 million to the
Company. The sale of e-conomic resulted in an uplift of 33% over the carrying
value of the investment at 31 December 2016. This transaction delivered an
overall return of c. 2.7x cost and a c. 28% gross IRR.
Valueworks
In July, we completed the sale of Valueworks, a provider of a private SaaS
platform for procurement and contract management in the social housing sector,
to Inprova, a provider of procurement services for social housing. This was
for a nominal sum and will not generate any proceeds to the Company.
Sequel Business Solutions
In August, we completed the sale of Sequel Business Solutions ('Sequel'), a
provider of software and services to the Lloyd's of London and the broader
insurance markets, to Verisk Analytics (Nasdaq: VRSK), a leading data
analytics provider serving customers in property/casualty insurance, natural
resources, and financial services, headquartered in Jersey City, NJ USA. This
transaction delivers a 5.1x investment multiple and a 77% gross IRR over the
investment period.
The sale of Sequel returned £20.2 million to the Company and resulted in an
uplift of 161% over the carrying value of the investment at 31 December 2016.
Mainio Vire
In June 2016, we announced the sale of Mainio Vire, a provider of elderly
care, mental health and home services in Finland, to Mehiläinen, a private
provider of social and health care services also based in Finland.
HgCapital retained a small residual stake in this company which was sold in
August 2017 returning a further c. £3.7 million to the Company.
Further details on investments as at 30 June 2017 can be found below.
SUMMARY OF INVESTMENT AND REALISATION ACTIVITY
INVESTMENTS MADE DURING THE PERIOD
Company Sector Geography Activity Cost £'000
Mitratech TMT North America Global provider of legal, risk and compliance software 22,258
fundinfo TMT Switzerland Technology platform for fund data and documentation 4,431
Gentrack TMT New Zealand Developer of software for utilities and airports 2,069
New investments 28,758
Esendex TMT UK Provider of business messaging services across Europe 10,066
Other 1,491
Further investments 11,557
Total investments on behalf of the Company 40,315
REALISATIONS MADE DURING THE PERIOD
Company Sector Exit route Proceeds1£'000
Zenith Services Secondary sale 59,090
QUNDIS Industrials Trade sale 37,302
Zitcom TMT Trade sale 8,818
Full realisations 105,210
Visma TMT Refinancing 12,874
HgCapital 6 E LP Fund Distributions received 5,591
A-Plan Services Refinancing 5,150
Ullink TMT Refinancing 4,317
Other 445
Partial realisations 28,377
Total realisations on behalf of the Company 133,587
1 Includes gross revenue received during the period.
OUTLOOK
The first six months of 2017 have been a strong period for HgCapital, with
substantial progress achieved and further momentum continuing to build across
the portfolio. This has been primarily driven by robust trading, in parallel
with a number of meaningful realisations completed at attractive valuations.
Over the last year, we have given much consideration to the UK's exit from the
EU and our prognosis remains that this will have a relatively limited impact
on the portfolio, especially given the characteristics of our businesses,
their geographic profile and their relatively protected nature. More broadly,
the post referendum environment has seen a general unwinding of historic
currency losses on non-sterling investments across our funds, benefiting
valuations over the year. Finally, we have also realised eight portfolio
companies since the Brexit vote at the end of June 2016, four of which were
based in the UK.
Trading over the first six months of 2017 has continued to generate double
digit revenue and EBITDA growth across the portfolio. Given the portfolio's
defensive characteristics and focus on protected business models, we believe
our investments are well positioned to see strong growth on an absolute and
relative basis going forward, even if macro economic conditions deteriorate
over the coming months.
In 2017, we have continued to invest selectively where we have built many
years of knowledge of the business and have a strong relationship with a
founder or management team. Despite the heat of the current market, we do
continue to see exciting and attractive investment opportunities in our target
geographies and sub-sectors, often in situations where our approach is
differentiated, given our strategy and sector knowledge.
This has led to four investments in the year-to-date: Mitratech, a global
provider of regulatory tax compliance software; Gentrack, a publicly listed
global developer of specialist software for energy utilities, water utilities
and airports; fundinfo, a technology platform for fund data and documentation;
and Esendex, a leading provider of mission-critical business messaging
services across Europe.
Over the period, we have returned close to £900 million to our clients,
including £134 million to the Company from three exits and three refinancings.
The largest of these were in relation to the realisations of Zenith, announced
in January, and QUNDIS which completed in May. Strong performance over the
period has continued to demonstrate the attractiveness of HgCapital portfolio
companies to both trade and financial buyers, as evidenced by the recent sale
of Zitcom, announced in June 2017, at a multiple of 3.3x original cost and a
gross IRR of 141%. We anticipate returning further capital over the course of
2017.
In this type of market environment, we believe that the clarity of our
investment strategy confers a number of clear advantages to a disciplined
buyer. Specifically, we will continue to focus on investing in businesses that
provide a business critical product or service, to a fragmented customer base,
and which benefit from strong contracted or recurring revenues. This should
enable us to identify opportunities with the appropriate business model to
generate strong, risk-adjusted returns for our clients.
In terms of leverage on new investments, all of our key UK and European
relationship banks remain committed to the market generally and focused on
maintaining close relationships with HgCapital.
Finally, our focus on specific operational improvements in these areas of
investment focus, aligned with the efforts of a dedicated and large internal
team, also means that we believe we can continue to generate meaningful
long-term value in a number of particular areas across the portfolio on a
repeatable basis, irrespective of the challenges of the broader macro
environment. From pricing analysis and customer satisfaction to cyber
security, these portfolio related initiatives will continue to remain an area
of real focus going forward.
"Strong trading from the portfolio, combined with capital returns from exits
above book value, continue to drive value for our investors."
Steven Batchelor, Partner at HgCapital
OVERVIEW OF THE UNDERLYING INVESTMENTS HELD THROUGH
FUND LIMITED PARTNERSHIPS
Investments Fund Sector Location Year of invest-ment Residualcost£'000 TotalValuation5£'000 Portfolio value% Cum. value%
(in order of value)
1 Visma1 HGT 7/HGT 6/HGT TMT Scandinavia 2014 41,396 112,140 17.9% 17.9%
2 IRIS HGT 6 TMT UK 2011 26,109 75,362 12.0% 29.9%
3 Sovos Compliance2 HGT 7/HGT TMT North America 2016 24,284 44,466 7.1% 37.0%
4 JLA HGT 6 Services UK 2010 3,511 26,162 4.2% 41.2%
5 CogitalGroup2 HGT 7/HGT Services UK 2016 20,966 23,281 3.7% 44.9%
6 Mitratech2 HGT 7/HGT TMT North America 2017 22,258 21,263 3.4% 48.3%
7 Parts Alliance (sold) HGT 6 Services UK 2012 10,495 21,125 3.4% 51.7%
8 Achilles3 HGT TMT UK 2008 15,218 20,015 3.2% 54.9%
9 A-Plan HGT 7 Services UK 2015 10,447 19,752 3.1% 58.0%
10 Ullink HGT 7 TMT France 2014 7,393 19,163 3.1% 61.1%
11 Raet HGT 7 TMT Netherlands 2016 16,127 18,457 2.9% 64.0%
12 The Foundry HGT 7 TMT UK 2015 15,175 18,266 2.9% 66.9%
13 Esendex4 Mercury/HGT TMT UK 2016 14,283 15,788 2.5% 69.4%
14 Radius HGT 6 Services UK 2013 17,992 15,535 2.5% 71.9%
15 Allocate Software Mercury TMT UK 2014 4,094 12,425 2.0% 73.9%
16 Citation HGT 7 Services UK 2016 10,233 11,742 1.9% 75.8%
17 Lumesse HGT 6 TMT UK 2010 20,807 10,520 1.7% 77.5%
18 Trace One Mercury TMT France 2016 4,489 9,685 1.5% 79.0%
19 Intelliflo Mercury TMT UK 2013 3,978 9,447 1.5% 80.5%
20 Sequel Business Solutions (sold) Mercury TMT UK 2014 2,252 8,962 1.4% 81.9%
21 TeamSystem HGT 6 TMT Italy 2010 144 8,565 1.4% 83.3%
22 STP Mercury TMT Germany 2016 5,422 7,611 1.2% 84.5%
23 Eucon Mercury TMT Germany 2015 4,408 7,250 1.2% 85.7%
24 P&I2 HGT 7/HGT TMT Germany 2013 1,796 7,047 1.1% 86.8%
25 Teufel HGT 6 Industrials Germany 2010 11,144 6,769 1.1% 87.9%
26 QUNDIS HGT 6 Industrials Germany 2012 922 6,538 1.0% 88.9%
27 Kinapse HGT 7 Services UK 2016 10,017 6,206 1.0% 89.9%
28 Frösunda HGT 6 Healthcare Scandinavia 2010 14,296 6,043 0.9% 90.8%
29 EidosMedia HGT 7 TMT Italy 2015 8,414 5,662 0.9% 91.7%
30 fundinfo Mercury TMT Switzerland 2017 4,431 4,727 0.8% 92.5%
31 Evaluate Mercury TMT UK 2016 3,660 4,170 0.7% 93.2%
32 Mainio Vire (sold) HGT 6 Healthcare Finland 2011 6,503 3,165 0.5% 93.7%
33 Atlas HGT Services UK 2007 12,542 2,866 0.4% 94.1%
34 Gentrack HGT 7 TMT New Zealand 2017 2,069 2,580 0.4% 94.5%
35 Valueworks (sold) Mercury TMT UK 2012 2,844 - - 94.5%
Non-active investments (3) 741 214 - 94.5%
Total buyout investments (38) 380,860 592,969 94.5%
Currency hedges HGT 7/HGT 6/HGT Forward sale of US$ - 1,931 0.3% 94.8% Currency Hedges
Secondary fund interest Hg6E Secondary fund interest - 10,505 1.7% 96.5% Secondary fund interest
Renewable energy RPP1/RPP2 Renewable energy 31,001 22,376 3.5% 100.0% Renewable energy
Total all investments 411,861 627,781 100.0%
1 Investment through HGT 7 LP, HGT 6 LP (following
sale of e-conomic) and co-investment participation
through HGT LP.2 Investment through HGT 7 LP and co
-investment participation through HGT LP.3
Investment and co-investment participation through
HGT LP. 4 Investment through HgCapital Mercury D LP
and co-investment participation through HGT LP.5
Including accrued income but before the provision
for carried interest of £71,592,000.
THE TOP 20 BUYOUT INVESTMENTS
representing 82% of the total portfolio
Buyout investments are held through limited partnerships, of which the Company
is the sole limited partner. The Company invests alongside other clients of
HgCapital. Typically, the Company's holding forms part of a much larger
majority interest held by HgCapital's clients in buyout investments in
companies with an enterprise value ('EV') of between £20 million and £500
million. HgCapital's Review generally refers to each transaction in its
entirety, apart from the tables detailing the Company's participation or where
it specifically says otherwise.
1. Visma
Website: www.visma.com
Original enterprise value: NOK 21 billion
HgCapital clients' total equity: 30.9%
Business description
Visma is a leading provider of mission critical business software to SMEs in
the Nordic region and the Netherlands. Headquartered in Oslo with significant
revenues in Sweden, Finland, Denmark and the Netherlands, the company provides
accounting; resource planning and payroll software to its customer base of
over 600,000 enterprises. In September 2016, Visma announced the sale of Visma
BPO, its outsourcing services business, for NOK 4.1 billion (c. £380 million)
to HgCapital 7, forming part of the newly launched CogitalGroup (described
below).
Why did we invest?
Visma was an early example of HgCapital's focus on recurring revenue, business
critical application software companies serving SMEs and their advisers. The
company enjoys high levels of predictable, recurring revenue resulting from a
subscription payment model. When HgCapital first invested, in 2006, both
organic and acquisition driven revenue growth opportunities were identified,
as well as significant opportunities to increase profit margins.
How do we create value?
Visma has consistently exceeded our investment plans. In April 2014, following
a decision by majority owner KKR to sell part of its original 2010 stake in
Visma, HgCapital decided to sell its remaining stake, generating a total
return between 2006 and 2014 of 5.2x original cost and a gross IRR of 33%.
HgCapital clients then re invested £409 million in the business for a 31%
stake, via the HgCapital 7 fund and co-investment, as a co-lead investor,
alongside KKR and Cinven. This valued the business at a total EV of NOK 21
billion (£2.1 billion). In 2017 HgCapital announced a further investment into
Visma following the sale of KKR's stake valuing the business at NOK 45 billion
(£4.2 billion) The continued reinvestment in Visma reflects our conviction in
the continuing strength of the business, backing a management team we know
well with a strong track record of creating value for investors.
What has been achieved?
Since our first investment in 2006, Visma has acquired over 120 companies,
notably: Mamut ASA, a provider of ERP software to small customers in Norway
(2011); Netvisor, a provider of SaaS based ERP software to the Finnish small
customer segment (2011); Agda, a Swedish provider of payroll software to SMEs
(2012); InExchange, a Swedish e-invoicing leader (2013); Huldt & Lillevick, a
payroll provider to SMEs (2014); e-conomic / SpeedLedger (2015); TripleTex, a
Norwegian SaaS micro ERP player; EasyCruit, recruitment software solutions
(2016); and Bluegarden, a leading payroll player in Denmark with a presence
across Scandinavia due to complete in the second half of 2017. These deals
strengthened organic growth from innovation in new products, as well as
driving margin improvement through a reorganisation of Visma's internal
processes. Visma is now positioned as one of the leading and largest SaaS
companies in Europe, with above NOK 2 billion of pure SaaS revenues.
How is it performing?
Visma continues to see strong double-digit growth in revenue and EBITDA. Over
the 11 years that HgCapital has been invested in the business, Visma's
revenues and EBITDA have seen a compound annual growth of 17% and 23%
respectively.
Following the announced realisation and further re-investment by HgCapital,
the Company's valuation of its stake in Visma has seen a material increase of
£31 million over the first half of 2017.
How will we crystallise value?
Visma has a scale and growth profile which would make it an attractive
candidate for an initial public offering ('IPO') or a large 'private IPO',
where multiple larger institutional or sovereign wealth-type investors could
choose to invest in the business.
Visma - The Company's underlying investment through HGT 7 LP, HGT 6 LP and co-investment
through HGT LP
Sector
- More to follow, for following part double click ID:nRSK2902QcRecent news on HgCapital Trust
See all newsREG - HgCapital Trust PLC - Result of AGM
AnnouncementREG - HgCapital Trust PLC - Block listing Interim Review
AnnouncementREG - HgCapital Trust PLC - 1st Quarter Results
AnnouncementREG - HgCapital Trust PLC - Director/PDMR Shareholding
AnnouncementREG - HgCapital Trust PLC - Director/PDMR Shareholding
Announcement