REG - HG Capital Trust PLC - Interim Report and Accounts <Origin Href="QuoteRef">HGT.L</Origin> - Part 3
21/08/2015 07:00
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and professional services markets, and it is
considering further product-led M&A targets.
How is it performing?
Notwithstanding the difficult economic environment in Italy, TeamSystem
continues to win market share and grow. The business has achieved improved
double-digit growth in sales and profits into 2015 as the benefits from
synergies as a result of the 2014 acquisitions have started to come through.
How will we crystallise value?
We see a diverse range of exit options for TeamSystem, with interest from
trade and financial buyers previously evidenced in the sector and an IPO on
the Italian stock market a possibility given the scale of the company and
local demand for technology stocks.
TeamSystem - Trust's underlying investment through HGT 6 LP
Sector Location Date of investment Residual cost Unrealised value
£'000 £'000
TMT Italy Sep 2010 24,432 34,747
4. P&I
Website: www.pi-ag.com
Original enterprise value: E438 million
HgCapital clients' total equity: 84.5%
Business description
Headquartered in Wiesbaden, Germany, P&I is a leading supplier of payroll and
HR-related software to mid-market companies and the public sector in Germany,
Austria and Switzerland. The company serves more than 15,000 customers. The
business offers software for the management of payroll, workforce, time
management and human capital management.
It typically serves "Mittelstand" businesses with 200-5,000 employees, across
a range of industries, as well as medium-sized and large public sector
customers. It employs almost 400 people with offices in Austria, Switzerland,
Slovakia and the Netherlands; and it has partners in nine additional European
countries.
Why did we invest?
P&I displays specific characteristics that HgCapital looks for in its
portfolio companies: a scalable business model with a broad, diversified
customer base; strong customer loyalty; and a significant share of recurring
revenues, driven by on-going regulatory changes.
P&I is highly rated among both its customers and the market for the quality of
its products. The organisation (particularly the sales force) is very well
managed and highly efficient.
How do we intend to create value?
HgCapital continues to see attractive long-term growth in the European payroll
and transactional HR sector for leading, innovative players. We will support
P&I's continued development of its new product offerings, including the
addition of further Human Capital Management (HCM) functionality, and the
strengthening of their recurring revenue base by cross-selling their new
product service technology (P&I Big Data) into their customer base.
Furthermore, we see potential M&A opportunities in the relatively fragmented
HR management systems, payroll, time management and expenses market.
What has been achieved?
With HgCapital's support, P&I has recently acquired Switzerland based payroll
vendor Soreco HR. HgCapital is additionally focused on strengthening P&I's
financial and operating reporting as well as defining the company's forward
business plan.
How is it performing?
P&I continues to perform well and has seen double-digit growth over the last
year.
This has been driven by strong sales to both existing and new customers with
growth in high margin revenue streams (e.g. license, maintenance and Big Data)
leading to margin expansion.
How will we crystallise value?
We believe that the combination of an increase in recurring revenues, high
cash flow conversion and a strong product will be highly attractive at exit
for both trade and financial buyers.
P&I - Trust's underlying investment through HGT 7 LP and co-investment through HGT LP
Sector Location Date of investment Residual cost Unrealised value
£'000 £'000
TMT Germany Dec 2013 22,101 32,519
5. JLA
Website: www.jla.com
Original enterprise value: £150 million
HgCapital clients' total equity: 81.7%
Business description
JLA is a leading provider of on-premises laundry services, providing
distribution, rental and servicing of commercial laundry machines to the UK
SME market, mainly to care homes and small hotels.
The company is also a leading provider of coin operated, commercial machines
into accommodation units (e.g. universities, worker accommodation units etc.)
which it serves via its Circuit brand.
JLA has recently extended its offering into catering equipment, which is
typically used by its existing customers, as well as the supply of detergents.
Further additions to JLA's offering are planned.
Why did we invest?
JLA enjoyed strong operating performance, including sustained organic growth
through the period 2007-2009.
It has a diverse customer base that considers laundry as a mission-critical
part of their day-to-day business. With a high proportion of customers in
long-term contracts (representing a high level of revenues and a greater
proportion of profits), there are attractive recurring revenues and a high
level of forward revenue visibility.
How do we intend to create value?
HgCapital is working alongside management to increase the benefit of selling
new products and services through JLA's existing sales force and service
network.
In addition, we plan to continue to make further bolt-on acquisitions, both in
the laundry and catering markets.
What has been achieved?
A number of projects have been initiated covering strategic planning, customer
retention and pricing. In addition, management has been strengthened and ten
small bolt-on acquisitions of smaller laundry and kitchen equipment companies
have been completed, all funded out of free cash flow. The business now has a
dedicated M&A team and the pipeline for further acquisitions is under
development.
How is it performing?
JLA has continued to experience year-on-year organic sales growth rates of
7-9% driven by growth in the core Total Care and Circuit divisions, which has
been supported by expansion into the Catering sector, which now comprises
c.25% of group revenue. Going forward, the investment in the catering division
and continuing transition of customers to the Total Care offering should
affect margins positively.
How will we crystallise value?
HgCapital is focused on positioning JLA as a platform for selling critical
asset maintenance services into SMEs. The most likely exit route for JLA is
either a secondary sale to a private equity investor or a trade sale. We
believe that the long-term recurring nature of contracts coupled strong
customer loyalty should support an attractive exit rating.
JLA - Trust's underlying investment through HGT 6 LP
Sector Location Date of investment Residual cost Unrealised value
£'000 £'000
Services UK Mar 2010 12,224 27,527
6. Zenith Leasedrive
Website: www.leasedrive.com www.zenith.co.uk
Original enterprise value: £337 million
HgCapital clients' total equity: 65.2%
Business description
Zenith Leasedrive is the largest independent vehicle leasing business in the
UK. It was formed in March 2014 through the merger of Zenith Vehicle Contracts
and the Leasedrive Group.
Headquartered in Leeds, with full-service operations in both Solihull and
Wokingham, the combined group has over 500 employees and provides end-to-end
automotive solutions focused on contract hire, short-term hire and fleet
management services to customers across the UK. The company operates a fleet
of over 80,000 vehicles and focuses on serving blue-chip customers,
principally as sole supplier.
Why did we invest?
Zenith Leasedrive has strong core profitability aligned with double-digit
revenue growth, high cash flow conversion and offers a low ticket,
business-essential service to a largely fragmented customer base with a high
customer retention rate. In addition to growing its core contract hire fleet,
we believe substantial growth can be achieved in the emerging salary-sacrifice
marketplace in the UK. The merger was driven by the highly complementary
nature of the two businesses and the potential to create significant economies
of scale as a larger group.
How do we intend to create value?
In addition to supporting core customer growth, there is the opportunity for
significant improvement in operating and financing efficiency through the
enhanced scale afforded by the merger. This platform should also enable
further strategic M&A, where HgCapital's experience in buy-and-build and the
company's flexible capital structure makes Zenith Leasedrive a compelling
acquirer.
What has been achieved?
Leasedrive was acquired in December 2013, and we subsequently completed the
acquisition of Zenith in February 2014. At the beginning of March 2014, Zenith
and Leasedrive began operating as a single entity. To date, the integration of
the two companies has gone well with significant synergies realised.
HgCapital continues to support management to drive the value of the investment
through potential bolt-on acquisition opportunities and by improving
operational and financial efficiency.
How is it performing?
The combined business has continued to see strong double-digit revenue and
EBITDA growth into 2015. Despite a competitive environment, Zenith Leasedrive
has won some very large new customers over the last six months which will
continue to drive further growth.
How will we crystallise value?
We believe that the combination of largely contracted growth, high cash flow
conversion and a proven platform for M&A will make Zenith Leasedrive an
attractive opportunity for both trade and financial buyers.
Zenith Leasedrive - Trust's underlying investment through HGT 6 LP
Sector Location Date of investment Residual cost Unrealised value
£'000 £'000
Services UK Dec 2013 16,245 25,701
7. The Foundry
Website: www.thefoundry.co.uk
Original enterprise value: £200 million
HgCapital clients' total equity: 82.9%
Business description
The Foundry is a leading global developer of computer graphics, high-end
visual effects ("VFX") and 3D design software for the design, visualisation
and entertainment industries. The company was founded in 1996 and is
headquartered in London, with offices in Manchester, Los Angeles and Silicon
Valley; it has more than 2,000 customers in over 100 countries and employs c.
270 people.
The firm has set the de facto standard in the film post-production VFX space
with its NUKE product. In 2012, the company acquired MODO, a 3D modelling
product that gained the company access to the gaming and design segments.
Since the acquisition, the Foundry has grown MODO significantly through funded
development projects in the design sector.
Why did we invest?
HgCapital has known the company for several years and this investment is in
line with HgCapital's proven sector-focused approach of investing in leading
global providers of vertical market application software. The Foundry shares
many of the characteristics that HgCapital looks for, providing an excellent
platform for growth across a diversified client base and a commitment to
innovation.
The Foundry is rich in intellectual property and positioned well against
favourable segment trends that could allow for an upside return to be achieved
through a number of new business initiatives. We see potential from continuing
to leverage world-class products in new segments.
How do we intend to create value?
HgCapital will work closely with the management team to help the business
accelerate its high rate of organic growth, in particular the ongoing
development of disruptive technologies driving creative control and production
efficiency. HgCapital will also work with The Foundry with the aim of
identifying value accretive M&A to support the business and its management in
building a global software champion.
What has been achieved?
The current focus is the future strategy, and the portfolio team are working
with management on the business plan. It is likely that this will explore
pricing mechanisms and marketing channels.
How is it performing?
The Foundry has seen strong double-digit revenue growth over the last twelve
months and we are currently making significant investment in the business to
drive future growth.
How will we crystallise value?
We believe The Foundry will be an attractive acquisition target to both trade
and financial buyers, given its robust organic revenue growth, high EBITDA
margins and large market share.
The Foundry - Trust's underlying investment through HGT 7 LP
Sector Location Date of investment Residual cost Unrealised value
£'000 £'000
TMT UK May 2015 20,101 20,11
8. e-conomic
Website: www.e-conomic.com
Original enterprise value: DKK 634 million
HgCapital clients' total equity: 83.4%
Business description
Founded in 2001 in Copenhagen, e-conomic is a leading European SaaS accounting
solutions provider for SMEs. It has over 90,000 customers for its core product
e-conomic; over 25,000 customers from the acquisition of Speedledger
(www.speedledger.se); and over 320,000 sign-ups for its freemium invoicing,
expenses and accounting-lite product, Debitoor (www.debitoor.com).
The company operates with its e-conomic product in its core home market of
Denmark and serves customers in various other European countries, including
Norway, Sweden, Spain and Germany. Debitoor is used by customers in over 50
countries, with the largest customer base in Germany and Spain. e-conomic's
products enable its customers to perform their accounting at a reasonable
price, more efficiently and with greater flexibility through the internet,
allowing real time collaboration with their accountants. Speedledger is
closely integrated with its customer's online banking through strong
partnerships with leading Swedish banks.
Why did we invest?
e-conomic operates an attractive business model with recurring revenues and a
broad and loyal customer base, which consists mainly of small businesses with
up to 100 employees, as well as more than 4,000 accountancy practices of all
sizes. The SME SaaS sector is expected to continue to grow strongly in the
coming years, due to increasing SaaS penetration; HgCapital will support
e-conomic's management to capitalise on this opportunity.
How do we intend to create value?
As the expected growth of the SME SaaS bookkeeping market unfolds over the
next few years, HgCapital plans to support e-conomic's management in its
expansion by both organic growth and acquisition.
What has been achieved?
HgCapital has supported e-conomic in a number of projects including:
strengthening the management team; building its internationalisation strategy;
forming partnerships outside Scandinavia including the acquisition in October
2014 of Speedledger, a Swedish SaaS accounting firm.
How is it performing?
e-conomic continues to report strong double-digit revenue growth, driven by
both increasing new customers and larger spend per current client. However, as
originally envisaged, profits have continued to be materially held back in the
medium-term by sustained expenditure on resources to build the platform for
further growth. We expect to see the impact of this investment come through in
the next 12 months.
How will we crystallise value?
In July 2015, the TMT team completed the sale of the core Scandinavian
business of e-conomic to Visma, in an all-share deal. The Trust will retain a
stake in e-conomic's international business and Debitoor.
e-conomic - Trust's underlying investment through HGT 6 LP
Sector Location Date of investment Residual cost Unrealised value
£'000 £'000
TMT Nordic Region Aug 2013 14,380 19,326
9. Achilles
Website: www.achilles.com
Original enterprise value: £75 million
HgCapital clients' total equity: 63.0%
Business description
Achilles manages a global network of collaborative industry communities. The
business provides a cloud-based service enabling networks of buyers to create
industry standards for collecting and validating supplier information. This is
made available through the Achilles platform together with search, reporting
and risk management tools.
Suppliers join the platform to gain access to the whole community of buyers
and information to help them achieve and maintain compliance. Both buyers and
suppliers pay annual subscription fees.
The verified data gathered and delivered by Achilles is crucial to support
processes around risk management and compliance with regulatory, social
responsibility, and health and safety requirements. Achilles currently
operates more than 30 communities across 22 countries in five continents.
Why did we invest?
Achilles is a subscription-based network business model with significant
recurring revenue streams. It is a leading company in supply chain data, with
stable growth driven by the increasing need for risk management.
How do we intend to create value?
With high levels of contracted revenue, Achilles' position as a global,
scalable business model has considerable potential in revenue and margin
growth, as well as multiple opportunities for expansion into new geographies
and industries.
What has been achieved?
We have made a material investment into the business focused on the
development of their technology, processes and sales to support global
growth.
This investment has significantly enhanced the global scalability and
competitive positioning of the business.
How is it performing?
With the considerable transformation of the business that is underway,
Achilles is experiencing lower than trend revenue growth year-on-year.
Significant investment in the company's global infrastructure has reduced
profits in the short-term and we would expect margins to rise over the
medium-term, as global efficiencies are achieved.
How will we crystallise value?
There has been strong interest in Achilles from both strategic and private
equity buyers and the business's recurring revenue base is likely to maintain
this interest throughout the economic cycle. An IPO is also a possibility.
Achilles - Trust's underlying investment through HGT LP
Sector Location Date of investment Residual cost Unrealised value
£'000 £'000
TMT UK Jul 2008 5,218 18,794
10. SimonsVoss
Website: www.simons-voss.com
Original enterprise value: E113 million
HgCapital clients' total equity: 93.2%
Business description
SimonsVoss is a European leader in the development, manufacture and marketing
of electronic battery-powered locking and access control systems, mainly for
public, commercial and residential buildings.
SimonsVoss has a proven track record of developing state-of-the-art
applications with a pipeline of innovative new products. Revenues primarily
originate in Germany, with an increasing number of sales in international
markets.
Why did we invest?
Operating in a niche segment with considerable technological expertise, the
company's robust trading through the recession saw it thrive in a depressed
market, with EBITDA growing by an average of 12% p.a. between 2005 and 2013.
The business continues to grow in Germany and internationally, as well as into
attractive new product segments. SimonsVoss has an established in-house R&D
function aiming for a constant expansion of its innovative product range,
whilst reducing production costs.
How do we intend to create value?
Having rebuilt and grown the sales teams, SimonsVoss is looking to continue to
drive its business in Germany as well as expansion in adjacent geographic
markets such as France, Benelux, Denmark and Sweden, as well as Asia. This is
supported by new, innovative products including: passive technology, digital
door fittings, and compact readers.
Additionally, SimonsVoss is integrating products with building technology
solutions of large OEMs (e.g. Siemens) which will further drive demand.
Profitability should improve through higher volumes and various operational
efficiencies.
What has been achieved?
During HgCapital's involvement, SimonsVoss has developed away from a
single-product focused company into a solution provider in electronic access
control, offering a comprehensive product family in order to address
proactively new technology trends and to push internationalisation.
The Board and management have been strengthened with a focus on pushing growth
through new customer groups, distribution channels and geographic markets.
How is it performing?
SimonsVoss is forecasting sales growth of 6% for 2015 with an increase in
profit margins due to operating leverage.
How will we crystallise value?
In June 2015, we announced the sale of SimonsVoss to Allegion plc, a global
security products and solutions provider. The Trust will realise cash proceeds
of approximately £18.6 million on completion of the transaction, which is
subject to regulatory approval (expected September 2015). This represents an
uplift of £1.0 million (6 pence per share) over the carrying value of £17.6
million in the NAV of the Trust at 31 December 2014.
SimonsVoss - Trust's underlying investment through HGT 6 LP
Sector Location Date of investment Residual cost Unrealised value
£'000 £'000
Industrials Germany Jun 2010 11,961 18,189
FINANCIAL STATEMENTS
INCOME STATEMENT
FOR THE SIX MONTHS ENDED 30 JUNE 2015
Notes Revenue return Capital return Total return
Six months ended Year ended Six months ended Year ended Six months ended Year ended
30.6.2015£'000 30.6.2014£'000 (unaudited) 31.12.2014£'000 30.6.2015£'000 30.6.2014£'000 (unaudited) 31.12.2014£'000 30.6.2015£'000 30.6.2014£'000 (unaudited) 31.12.2014£'000
(unaudited) (audited) (unaudited) (audited) (unaudited) (audited)
Gains on investments,government securities and - - - 8,281 4,869 34,752 8,281 4,869 34,752
liquidity funds net of provision for carried
interest
Losses on priority profit share loans advanced 7(b) - - - (627) (1,330) (2,435) (627) (1,330) (2,435)
to General Partners
Net income 6 11,548 22,591 24,168 - - - 11,548 22,591 24,168
Other expenses 8(a) (1,121) (875) (1,734) - - - (1,121) (875) (1,734)
Net return before finance costs and taxation 10,427 21,716 22,434 7,654 3,539 32,317 18,081 25,255 54,751
Finance costs 8(b) (196) (247) (455) - - - (196) (247) (455)
Net return from ordinary activities before 10,231 21,469 21,979 7,654 3,539 32,317 17,885 25,008 54,296
taxation
Taxation charge on ordinary activities 10 (305) (144) (46) - - - (305) (144) (46)
Net return from ordinary activities after 9,926 21,325 21,933 7,654 3,539 32,317 17,580 24,864 54,250
taxation attributable to reserves
Return per Ordinary share 11(a) 26.59p 57.13p 58.76p 20.51p 9.48p 86.58p 47.10p 66.61p 145.34p
The total return column of this statement
represents the Trust's income statement. The
supplementary revenue and capital return
columns are both prepared under guidance
published by the Association of Investment
Companies ('AIC'). All recognised gains and
losses are disclosed in the revenue and
capital columns of the income statement and as
a consequence no statement of total recognised
gains and losses has been presented.All
revenue and capital items in the above
statement derive from continuing operations.No
operations were acquired or discontinued
during the year. The notes below form part of
these financial statements.
BALANCE SHEET
Notes 30.6.2015£'000 30.6.2014 31.12.2014£'000
(unaudited) £'000 (audited)
(unaudited)
Fixed asset investments
Investments at fair value through profit and loss:
Unquoted investments 396,389 311,898 359,930
Total fixed asset investments 396,389 311,898 359,930
Current assets - amounts receivable after one year:
Accrued income on fixed assets 64,134 65,573 54,311
Current assets - amounts receivable within one year:
Debtors 675 1,210 632
Investments at fair value through profit and loss:
Government securities and liquidity funds 18,942 70,503 59,859
Cash 3,836 6,350 3,021
Total current assets 87,587 143,636 117,823
Creditors - amounts falling due within one year (1,422) (910) (835)
Net current assets 86,165 142,726 116,988
Net assets 482,554 454,624 476,918
Capital and reserves:
Called up share capital 9,331 9,331 9,331
Share premium account 120,368 120,368 120,368
Capital redemption reserve 1,248 1,248 1,248
Capital reserve - unrealised (19,896) (39,358) (33,390)
Capital reserve - realised 347,538 330,568 353,378
Revenue reserve 23,965 32,467 25,983
Total equity shareholders' funds 482,554 454,624 476,918
Net asset value per Ordinary share 11(b) 1,292.9p 1,218.0p 1,277.8p
Ordinary shares in issue at 30 June / 31 December 11(b) 37,324,698 37,324,698 37,324,698
AS AT 30 JUNE 2015
The financial statements below were approved and authorised for issue
by the Board of Directors on 20 August 2015 and signed on its behalf by:
Roger Mountford, Chairman
Richard Brooman, Director
The notes below form part of these financial statements.
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED 30 JUNE 2015
Six months ended Year ended
Note 30.6.15£'000 30.6.14£'000 31.12.14£'000
(unaudited) (unaudited) (audited)
Net cash inflow from operating activities 9 212 5,686 16,875
Servicing of finance (196) (247) (455)
Taxation received 113 289 289
Investing activities:
Purchase of fixed asset investments (40,465) (24,727) (86,962)
Proceeds from the sale of fixed asset investments 12,279 13,484 57,752
Net cash outflow from capital expenditure and financial investment (28,186) (11,243) (29,210)
Financing activities:
Repayment of loan facility (237) (1,421) (1,184)
Equity dividends paid (11,944) (10,824) (17,916)
Net cash outflow from financing activities (12,181) (12,245) (19,100)
Net cash outflow before management of liquid resources (40,238) (17,760) (31,601)
Management of liquid resources:
Purchase of government securities and liquidity funds (43) (26,500) (62,552)
Sale/redemption of government securities and liquidity funds 41,096 37,902 84,466
Net cash inflow from management of liquid resources 41,053 11,402 21,914
Increase/(decrease) in cash and cash equivalents in the period 815 (6,358) (9,687)
Cash and cash equivalents at 1 January 3,021 12,708 12,708
Cash and cash equivalents at 30 June / 31 December 3,836 6,350 3,021
The notes below form part of these financial statements.
STATEMENT OF CHANGES IN EQUITY
FOR THE SIX MONTHS ENDED 30 JUNE 2015
Non-distributable Distributable
Notes Sharecapital£'000 Sharepremiumaccount£'000 Capital redemption reserve£'000 Capital reserve - unrealised Capital reserve - realised£'000 Revenuereserve£'000 Total£'000
£'000
At 31 December 2014 9,331 120,368 1,248 (33,390) 353,378 25,983 476,918
Net return from ordinary activities - - - 13,494 (5,840) 9,926 17,580
Equity dividends paid 4 - - - - - (11,944) (11,944)
At 30 June 2015 9,331 120,368 1,248 (19,896) 347,538 23,965 482,554
At 31 December 2013 9,331 120,368 1,248 (38,526) 326,197 21,966 440,584
Net return from ordinary activities - - - 5,136 27,181 21,933 54,250
Equity dividends paid 4 - - - - - (17,916) (17,916)
At 31 December 2014 9,331 120,368 1,248 (33,390) 353,378 25,983 476,918
The notes below form part of these financial statements.
NOTES TO THE FINANCIAL STATEMENTS
1. Principal activity
The principal activity of the Trust is that of an investment trust company.
The Trust is an investment company as defined by Section 833 of the Companies
Act 2006 and an investment trust within the meaning of Sections 1158 and 1159
of the Corporation Tax Act 2010 ('CTA 2010'), and is registered as a public
company in England and Wales under number 1525583 with its registered office
at 2 More London Riverside, London SE1 2AP.
2. Basis of preparation
The financial statements have been prepared under the historical cost
convention, except for the revaluation of financial instruments at fair value
as permitted by the Companies Act 2006, and in accordance with applicable UK
law and UK Accounting Standards ('UK GAAP'), including Financial Reporting
Standard 102 - 'The Financial Reporting Standard applicable in the United
Kingdom and Republic of Ireland' ('FRS 102') and with the Statement of
Recommended Practice 'Financial Statements of Investment Trust Companies and
Venture Capital Trusts' ('SORP'), dated November 2014. All of the Trust's
operations are of a continuing nature.
The Trust has considerable financial resources and, as a consequence, the
Directors believe that the Trust is well placed to manage its business risks.
After making enquiries, the Directors have a reasonable expectation that the
Trust will have adequate resources to continue in operational existence for
the foreseeable future.
Accordingly, they continue to adopt the going concern basis in preparing the
annual report and accounts.
The same accounting policies, presentation and methods of computation are
followed in these financial statements as applied in the Trust's previous
annual audited report and accounts, however, certain presentational amendments
have been made to comply with the requirements of FRS 102.
3. Organisational structure, manager arrangements and accounting policies
Partnerships where the Trust is the sole limited partner
The Trust entered into four separate partnership agreements with general and
founder partners in May 2003 (subsequently revised in January 2009), January
2009, July 2011 and March 2013; at each point an investment holding limited
partnership was established to carry on the business of an investor, with the
Trust being the sole limited partner in these entities.
The purpose of these partnerships, HGT LP, HGT 6 LP, HgCapital Mercury D LP
and HGT 7 LP (together the 'primary buyout funds') is to hold all the Trust's
investments in primary buyouts. Under the partnership agreements, the Trust
made capital commitments into the primary buyout funds, with the result that
the Trust now holds direct investments in the primary buyout funds and an
indirect investment in the fixed asset investments that are held by these
funds, as it is the sole limited partner. These direct investments are
included under fixed asset investments on the balance sheet and in the
investment portfolio above. The underlying investments that are held
indirectly are included in the overview of investments above.
Partnerships where the Trust is a minority limited partner
In July 2011, the Trust made a direct secondary investment in HgCapital 6 E LP
('Hg6 E LP'), one of the partnerships that comprise the Hg6 Fund, in which the
Trust is now a limited partner alongside other limited partners. This is a
direct investment in the HgCapital 6 E LP Fund, as shown on the balance sheet
and in the investment portfolio above.
The Trust also entered into partnership agreements with the purpose of
investing in renewable energy projects by making capital commitments alongside
other limited partners in Hg Renewable Power Partners LP ('Hg RPP LP') and
HgCapital Renewable Power Partners 2 C LP ('Hg RPP2 LP') (together the
'renewable funds'). These are direct investments in the renewable funds, as
shown on the balance sheet and in the investment portfolio above.
Priority profit share and carried interest under the primary buyout limited
partnership agreements
Under the terms of the primary buyout fund limited partnership agreements
('LPAs'), each general partner is entitled to appropriate, as a first charge
on the net income of the funds, an amount equivalent to its priority profit
share ('PPS'). The Trust is entitled to net income from the funds, after
payment of the PPS.
In years in which these funds have not yet earned sufficient net income to
satisfy the PPS, the entitlement is carried forward to the following years.
The PPS is payable quarterly in advance, even if insufficient net income has
been earned. Where the cash amount paid exceeds the net income, an interest
free loan is advanced to the general partner by these primary buyout funds,
which is funded via a loan from the Trust. Such loan is only recoverable from
the general partner by an appropriation of net income; until net income is
earned, no value is attributed to this loan.
Furthermore, under the primary buyout funds' LPAs, each founder partner is
entitled to a carried interest distribution once certain preferred returns are
met. The LPAs stipulate that the primary buyout funds' capital gains (or net
income), after payment of the carried interest, are distributed to the Trust.
Accordingly, the Trust's entitlement to net income and net capital gains is
shown in the appropriate lines of the income statement. Notes 6, 7, and 9 to
the financial statements and the cash flow statement disclose the gross income
and gross capital gains of the primary buyout funds (including the associated
cash flows) and also reflect the proportion of net income and capital gains in
the buyout funds that have been paid to the general partner as its PPS and to
the founder partner as carried interest, where applicable.
The PPS paid from net income is charged to the revenue account in the income
statement, whereas PPS paid as an interest-free loan, if any, is charged as an
unrealised depreciation to the capital return on the income statement.
The carried interest payments made from net income and capital gains are
charged to the revenue and capital account respectively on the income
statement.
4. Dividends
A dividend of 32.0 pence per share (£11,944,000) was paid on 18 May 2015 in
respect of the year ended 31 December 2014 (year ended 31 December 2013:
dividend of 29.0 pence per share; £10,824,000). In addition, a special
dividend of 19.0 pence per share (£7,092,000) was paid on 26 September 2014.
It is intended that dividends will be declared and paid annually in respect of
each accounting period.
5. Issued share capital
Whilst the Trust no longer has an authorised share capital, the Directors will
still be limited as to the number of shares they can at any time allot as the
Companies Act 2006 requires that Directors seek authority from the
shareholders for the allotment of new shares.
Six months ended Year ended
30.6.15(unaudited) 30.6.14(unaudited) 31.12.14(audited)
No. '000 £'000 No. '000 £'000 No. '000 £'000
Ordinary shares of 25p each:
Allotted, called-up and fully paid:
At 1 January 37,325 9,331 37,325 9,331 37,325 9,331
At 30 June / 31 December 37,325 9,331 37,325 9,331 37,325 9,331
6. Income
Revenue return
Six months ended Year ended
30.6.2015£'000 30.6.2014£'000 31.12.2014£'000
(unaudited) (unaudited) (audited)
Income from investments held by HGT LP, HGT 6 LP, HGT 7 LP and HgCapital Mercury D LP:
UK unquoted investment income 9,571 3,140 9,099
Foreign unquoted investment income 5,308 15,047 13,620
Foreign dividend income - 7,093 7,093
Other investment income:
UK unquoted investment income - 441 441
Interest from government securities less amortisation of premium - (90) (99)
Liquidity funds income 172 83 329
Total investment income 15,051 25,714 30,483
Total other income 29 25 36
Total income 15,080 25,739 30,519
Priority profit share charge against income:
Current year - HGT 6 LP (1,598) (1,531) (3,105)
Current year - HgCapital Mercury D LP (996) - (32)
Current year - HGT 7 LP (631) (937) (2,059)
Current year - HGT LP (307) (680) (1,155)
Total priority profit share charge against income (3,532) (3,148) (6,351)
Total net income 11,548 22,591 24,168
Total net income comprises:
Dividend - 7,093 7,093
Interest 11,523 15,481 17,058
Non-interest income 25 17 17
Total net income 11,548 22,591 24,168
7. Priority profit shares and carried interest
Revenue return
Six months ended Year ended
(a) Priority profit share payable to General Partners 30.6.2015£'000 30.6.2014£'000 31.12.2014£'000
(unaudited) (unaudited) (audited)
Priority profit share payable:
Current year amount 4,159 4,478 8,786
Less: Current year loans advanced to General Partners (627) (1,330) (2,435)
Current year charge against income 3,532 3,148 6,351
Total priority profit share charge against income 3,532 3,148 6,351
The priority profit share payable on HGT LP, HGT 6 LP, HGT 7 LP and HgCapital
Mercury D LP rank as a first appropriation of net income from investments held
in HGT LP, HGT 6 LP, HGT 7 LP and HgCapital Mercury D LP respectively and is
deducted prior to such income being attributed to the Trust in its capacity as
a Limited Partner. The net income of HGT LP, HGT 6 LP, HGT 7 LP and HgCapital
Mercury D LP earned during the year, after the deduction of the priority
profit share, is shown on the income statement.
Capital return
Six months ended Year ended
(b) Priority profit share loans to General Partners 30.6.2015£'000 30.6.2014£'000 31.12.2014£'000
(unaudited) (unaudited) (audited)
Movements on loans to General Partners:
Losses on current year loans advanced to General Partners (627) (1,330) (2,435)
Total losses on priority profit share loans advanced (627) (1,330) (2,435)
to General Partners
In years in which the funds described in note 7(a) have not yet earned
sufficient net income to satisfy the priority profit share, the entitlement is
carried forward to the following years. The priority profit share is payable
quarterly in advance, even if insufficient net income has been earned. Where
the cash amount paid exceeds the net income, an interest free loan is advanced
to the general partner by these primary buyout funds, which is funded via a
loan from the Trust. Such loan is only recoverable from the general partner by
an appropriation of net income. Until sufficient net income is earned, no
value is attributed to this loan and hence an unrealised capital loss is
recognised and reversed if sufficient income is subsequently generated.
Capital return
Six months ended Year ended
(c) Carried interest to Founder Partners 30.6.2015£'000 30.6.2014£'000 31.12.2014£'000
(unaudited) (unaudited) (audited)
Carried interest provision:
Current year amount provided 11,566 - 1,088
11,566 - 1,088
The carried interest payable to the Founder Partners ranks as a first
appropriation of capital gains on the investments held in HGT LP, HGT 6 LP,
HGT 7 LP and HgCapital Mercury D LP, limited partnerships established solely
to hold the Trust's investments, and is deducted prior to such gains being
paid to the Trust in its capacity as a Limited Partner. The net amount of
capital gains of HGT LP, HGT 6 LP, HGT 7 LP and HgCapital Mercury D LP during
the year, after the deduction of carried interest, is shown on the income
statement. The details of the carried interest contracts, as set out on page
87 of the Annual Report, states that carried interest is payable once a
certain level of cash repayments have been made to the Trust, whereas carried
interest on HGT LP is based on its NAV. Based on the current repayments to
date in each individual partnership and the value of HGT LP, no carried
interest was payable in respect of the current or prior financial year.
However, in order to assess the fair value of the investments, the Board will
consider whether any carried interest provision is required at each reporting
period. A provision will be required if the aggregate of all realisations
achieved to date by a fund and the implied realisation amount generated, if
all unrealised investments in that fund are realised in cash at 30 June 2015
at their current valuation, will trigger a carried interest amount payable to
the Founder partner of that fund at that date. The above calculation for the
HGT6 LP and Hg6E investments implies that an amount of £12,654,000 will become
payable and therefore the Directors have increased the provision against the
investment by a further £11,566,000. The provision, as at 31 December 2014, of
£1,088,000 that was previously included in Creditors on the balance sheet, has
been reclassified as a provision against the investment (see the Investment
Portfolio on page 25) and the relevant balances as at 31 December have been
restated accordingly.
8. Other expenses
Revenue return
Six months ended Year ended
(a) Operating expenses 30.6.2015£'000 30.6.2014£'000 31.12.2014£'000
(unaudited) (unaudited) (audited)
Custodian and administration fees 282 263 537
Other administration costs 839 612 1,197
1,121 875 1,734
Revenue return
Six months ended Year ended
(b) Finance costs 30.6.2015£'000 30.6.2014£'000 31.12.2014£'000
(unaudited) (unaudited) (audited)
Interest paid 6 28 31
Non-utilisation fees and other expenses 190 219 424
196 247 455
Priority profit shares and other operating expenses, payable by partnerships
in which the Trust is a minority limited partner are recognised as unrealised
losses in the capital return section of the income statement and are not
separately disclosed in the above operating expenses.
9. Cash flow from operating activities
Six months ended Year ended
Reconciliation of net return before finance costs and taxation to net cash flow from operating activities 30.6.2015£'000 30.6.2014£'000 31.12.2014£'000
(unaudited) (unaudited) (audited)
Net return before finance costs and taxation 18,081 25,255 54,751
Add back: Gains on investments held at fair value (19,847) (4,869) (35,840)
Increase in carried interest provision 11,566 - 1,088
Amortisation of premium on government securities - 1,473 1,618
Increase in accrued income from liquidity funds (128) - (278)
Increase in prepayments, accrued income and other debtors (9,809) (15,968) (3,958)
Increase/(decrease) in creditors 349 (205) (506)
Net cash inflow from operating activities 212 5,686 16,875
10. Taxation
Taxation for the six month period is charged at 21% to 31 March 2015 and 20%
from 1 April 2015 (31 December 2014: 21.5%), representing the best estimate of
the average annual effective tax rate expected for the full year, applied to
the pre-tax income of the six month period.
In the opinion of the Directors, the Trust has complied with the requirements
of Section 1158 and Section 1159 of the CTA 2010 and will therefore be exempt
from corporation tax on any capital gains made in the year. The Trust expects
to designate all of any dividend declared in respect of this financial
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