REG - HgCapital Trust PLC - Half-year Report and Dividend Declaration
18/09/2023 07:00
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RNS Number : 6770M HgCapital Trust PLC 18 September 2023
HgCapital Trust plc
INTERIM RESULTS FOR THE PERIOD ENDED 30 JUNE 2023
Resilient NAV performance and continued realisation activity in a
challenging macro environment
London, 18 September 2023: HgCapital Trust plc ('HGT'), today announces its
interim results for the period ended 30 June 2023.
HGT provides investors with a listed vehicle to invest in unquoted businesses
managed by Hg, Europe's largest investor in software & technology-enabled
services businesses.
The objective of HGT is to provide shareholders with consistent long‑term
returns in excess of the FTSE All‑Share Index by investing predominantly in
unquoted companies where value can be created through strategic and
operational change.
Highlights over the first half of 2023 include:
¡ Strong portfolio trading continued to be the main driver of performance,
contributing to a total return NAV increase of 4.6%, closing the period at
473.1p NAV per share and net assets of £2.2 billion
¡ Share price total return of +7.1% over the period, closing at 370.50p per
share and a market capitalisation of £1.7 billion
¡ Against an uncertain macro environment, Hg maintained a disciplined
approach to new investment, deploying £33 million on behalf of HGT, including
one new investment and several follow-on investments in the portfolio to
finance bolt-on M&A
¡ £229 million returned to HGT, including the full realisation of
Transporeon
¡ Continued and significant long-term NAV outperformance of the FTSE
All-Share
¡ Performance provided through access to Hg's investments, which would in
aggregate represent the second largest and the fastest growing technology firm
in Europe(1)
An investment of £1,000 made 20 years ago in HGT would now be worth £24,963,
a total return of 2,396%. An equivalent investment in the FTSE All-Share Index
would be worth £4,208(2)
Jim Strang, Chairman of HGT, commented:
"Your Company has delivered a resilient performance over the first six months
of the year. The portfolio continued to deliver strong underlying performance
with sales and EBITDA across the top 20 investments (76% of the portfolio)
growing at 29% and 30% respectively. Investment activity was noticeably slower
in the first half of 2023 as the Manager took a cautious stance on adding to
the portfolio. Conditions for transactions in the second half of the year
appear more supportive."
(1) By Enterprise Value, Source: Hg, Factset
(2) All references to total return allow for all historic dividends being
reinvested
Please note: Past performance is not a reliable indicator of future results.
The value of shares and the income from them can go down as well as up as a
result of market and currency fluctuations and investors may not get back the
amount they originally invested.
David Toms, Head of Research at Hg, commented:
"Our portfolio continues to be driven by growth from existing customers,
itself supported by strong renewal rates, cross and up-sell. We enhance this
with consistent M&A, which remains a powerful accelerant of our
performance."
SUMMARY performance
31 August % Total 30 June 31 December % Total
2023
return
2023
2022
return
NAV per share 473.3p +4.7% 473.1p 456.6p +4.6%
Share price 389.0p +12.4% 370.5p 350.5p +7.1%
FTSE All-Share Index +2.7% +2.6%
YTD 2023 H1 2023
Movement
Movement
Net Asset Value £2.2bn +£77m £2.2bn £2.1bn +£76m
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 30 September 2023, therefore the movement in unrealised
value of the portfolio to the end of August 2023 is attributable to
post-period transactions and FX only.
Performance overview
Net assets of £2.2 billion, with continued long-term outperformance of the
FTSE All-Share over one, three, five, ten and twenty-year periods:
- NAV per share of 473.1p, a total return of +4.6% for the six months
to 30 June 2023.
- Share price total return of +7.1% over the year
- Proposed interim dividend of 2.0p per share
Strong double-digit growth from the realised and unrealised portfolio:
- Revenue and EBITDA growth of 29% and 30% respectively across the top
20 investments (76% of the portfolio) over the last twelve months.
- £229 million of cash returned to HGT primarily through the
realisation of Transporeon and secondary fund transactions
- Valuation multiple (EV/ LTM EBITDA) of 26.2x and net debt to LTM
EBITDA ratio of 7.4x for the top 20 investments (76% of the portfolio)
Continued investment and commitments to drive future value:
- £33 million invested on behalf of HGT into one new platform
investment, and several follow-on investments to support the growth of
existing portfolio companies
- New commitment of €125 million to Hg Mercury 4. Total outstanding
commitments at 30 June 2023 of £1.1 billion (December 2022: £1.2 billion).
These will be deployed over the next three to four years
- HGT's strong liquidity position coupled with commitments across the
most recent vintage of Hg funds ensure that the company is well-positioned to
take advantage of investment opportunities as they arise
Credit facility increase:
- The Board of HGT agreed a c.£60 million increase to the
multi-currency revolving credit facility bringing the total facility to £350
million, the full balance of which was available at period-end
POST PERIOD EVENTS
§ NAV of 473.3p at 31 August, YTD performance of 4.7% reflecting post-period
transactions and FX movements.
§ Net assets of £2.2 billion at 31 August.
§ Share price of 389.0p at 31 August, YTD performance of +12.4%.
§ Estimated gross proceeds of £55 million from the full exit of Commify, and
partial exits of Azets and TeamSystem to be received post period, at an
average uplift to carrying value of 39%.
§ New investment of £6m in Nomadia
§ Further €50m commitment to Hg Mercury 4 (€175 million total commitment)
§ Available liquid resources (including the credit facility) post-completion
of all announced transactions and the interim dividend payable in October
2023, are £657 million (30% of 31 August pro-forma NAV).
§ Outstanding commitments of £1.1 billion (49% of 31 August pro-forma NAV).
We expect these to be drawn down over the next three to four years.
Outlook
Commentary from Hg (the Manager):
We believe 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, can continue to drive long-term performance
§ Against a challenging macro environment, Hg's portfolio has demonstrated
resilient performance
§ The portfolio companies remain focused on selling business-critical and
non-discretionary software and services to their underlying business
customers, delivering predictable levels of recurring revenue
§ Positive trading outlook underpinned by long-term drivers for workplace
automation and digitisation which are set to transform the workplace for
professionals for decades to come
§ While we continue to screen a number of attractive investment
opportunities, we remain cautious given the ongoing macro uncertainty. Bolt-on
M&A remains a key focus to deploy capital and create incremental equity
value in the portfolio
§ During the first half of 2023, we remained focused on returning capital
to Hg clients, distributing c.£1 billion of liquidity, including £109
million to HGT. This followed an exceptionally strong 2022, when we returned a
total of £4 billion, of which HGT's share was £404 million. Further
liquidity events are expected over the next twelve months
- Ends -
The Company's 2023 Interim Report and an animated presentation from Hg to
accompany the results are available to view at:
http://www.hgcapitaltrust.com/ (http://www.hgcapitaltrust.com/) .
For further details:
HgCapital Trust plc
Laura Dixon +44 (0) 78 2459 2894
George Crowe +44 (0) 20 8152 5880
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)
Interim report and accounts
30 June 2023
HgCapital Trust plc (the "Company" or "HGT") announces its interim results for
the 6 months ended 30 June 2023 and the publication of its Interim Report for
the same period.
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
£2.2bn
Net assets
As at 31 December 2022: £2.1bn
+4.6%
NAV per share (473.1p)
6 months ended 30 June 2022: +1.8%
£1.7bn
Market capitalisation
As at 31 December 2022: £1.6bn
+7.1%
Share price (370.5p)
6 months ended 30 June 2022: -20.5%
2.0p
Interim dividend
As at 30 June 2022: 2.5p
1.6%
Total annualised ongoing charges
As at 30 June 2022: 1.3%
£33m
Cash invested on behalf of HGT
6 months ended 30 June 2022: £71m
£229m
Cash returned to HGT
6 months ended 30 June 2022: £29m
£597m
Available liquid resources
(28% of NAV)
As at 31 December 2022: £476m (23% of NAV)
£1.1bn
Outstanding commitments
(50% of NAV)
As at 31 December 2022: £1.2bn (57% of NAV)
Note NAV per share and share price return on a total return basis assuming all
historical dividends have been re-invested, which is an Alternative
Performance Measure ('APM').
Top 20 investments (76% of portfolio value)
A snapshot as at 30 June 2023
+29%
LTM sales growth
LTM 30 June 2022: +31%
+30%
LTM EBITDA growth
LTM 30 June 2022: +26%
26.2x
EV to EBITDA multiple
As at 31 December 2022: 27.2x
7.4x
Net debt to EBITDA ratio
As at 31 December 2022: 8.0x
£10bn
LTM revenues
LTM 30 June 2022: £7.7bn
£3bn
LTM EBITDA
LTM 30 June 2022: £2.4bn
30%
EBITDA margin
LTM 30 June 2022: 31%
Our portfolio continues to be driven by growth from existing customers,
supported by strong renewal rates, cross and up-sell. We enhance this with
M&A, which remains a powerful contributor to our performance.
David Toms, Head of Research, Hg
Chairman's statement
Your Company has delivered a resilient performance over the first six months
of the year. The portfolio continued to deliver strong underlying performance
with sales and EBITDA across the top 20 investments (76% of the portfolio)
growing at 29% and 30% respectively. Investment activity was noticeably slower
in the first half of 2023 as the Manager took a cautious stance on adding to
the portfolio. Conditions for transactions in the second half of the year
appear more supportive.
Jim Strang, Chairman, HgCapital Trust
Dear Shareholder,
The first six months of 2023 have provided a measure of respite from the
volatile market conditions that prevailed throughout 2022. While the external
environment continues to see elevated levels of risk, there has been a degree
of stabilisation. At a macroeconomic level, it would appear interest rates are
nearing their peaks for this current cycle, while there are encouraging signs
of lower levels of inflation, especially in the USA. The geo-political
environment remains challenging; however, it also appears to be stable for the
time being.
Highlights in H1 2023 included:
• 4.6% NAV per share growth on a total return basis, with net assets of
£2.2 billion;
• £229 million of proceeds returned to HGT, with one full realisation at
an uplift to book value of 18%;
• £33 million of new and further investments by HGT, across the core
investment clusters targeted by Hg;
• £107 million newly committed to invest alongside new Hg funds over the
next three to four years.
Performance
The NAV of HGT increased by 4.6% on a total return basis over the first half
of 2023, reflecting the ongoing strength of the operating performance of the
HGT portfolio. HGT's share price saw a total return of 7.1% over the period
and has seen a CAGR on a total return basis of 17.5% p.a. over the past 20
years, outperforming the FTSE All‑Share index by 10.1% p.a. over the same
period.
The total net assets of HGT at 30 June 2023 were £2.2 billion, an increase of
£76 million over the reported figures at 31 December 2022. The analysis of
NAV movements (on page 30 of the full Interim Report and accounts) set out a
breakdown of movements in the NAV and the underlying investment portfolio.
At the end of June 2023, the HGT portfolio consisted of 48 investments, all of
which conform to the Hg sector focus and investment strategy, targeting
software and tech-enabled 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 show strong revenue
growth over the last 12 months of 29% (June 2022: 31%) and EBITDA growth of
30% (June 2022: 26%), reflecting the defensive-growth nature of the businesses
in which HGT is invested. The portfolio not only continues to generate strong
top line growth but profitability remains as robust as ever, with the top 20
companies reporting an average EBITDA margin of 30%. Currently, 97% 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 companies which benefit from highly predictable forward cash flows, 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 we feel is appropriate given the highly recurring
revenues of the businesses that make up the Hg portfolio. Given the average
valuation multiple for the portfolio is 26.2x EV-to-EBITDA, this implies a
loan-to-value across the portfolio of c.28%, implying significant equity
cushion within the portfolio and giving the Manager confidence that this is a
prudent level of leverage for the assets within the portfolio. The Manager has
a dedicated capital markets team who continually monitor and manage 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.
Investments and realisations
New investment activity was relatively light over the first six months of the
year with a total of £33 million deployed in one new acquisition (GTreasury;
Hg Mercury 4) and several follow-on investments to finance bolt-on M&A, 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.
A total of £229 million was received from full and partial exits, notably
from the completion of the previously announced sale of Transporeon. This exit
was originally signed in late 2022, generating proceeds of £109 million for
HGT, an uplift of 18% to the last carrying value of the investment. The fund
level portfolio rebalancing that was announced previously, involving a
resizing of the commitment to Hg Saturn 3 and a partial secondary sale of Hg
Genesis 8, has also now been completed.
Realisation activity has continued post-period, with the signings of partial
exits of TeamSystem and Azets and the full exit of Commify. These transactions
represented significant uplifts to carrying value of 68%, 16% and 32% to their
last carrying value respectively. This illustrates the attractiveness of HGT's
portfolio companies to buyers, despite the uncertain macro environment and
rising cost of debt required to finance acquisitions.
Fundraising
Hg's success in building and creating value in the portfolio supported a new
round of fundraising in the period, in which HGT participated, to support
HGT's long-term NAV growth ambitions. Hg has raised significant capital over
the last two years and HGT will continue to participate across the Hg fund
families as Hg's largest single investor. HGT's commitments to the new Hg
funds ensure that HGT maintains access to Hg's transactions, including
co-investment opportunities, in what is anticipated to be an attractive
environment for new investments. HGT continues to benefit from a unique opt
out clause within its underlying investment agreements with Hg, allowing HGT
to opt out of new investments without penalty, should it not have sufficient
liquidity. This provides a useful risk management tool for the Board in
managing and optimising the HGT balance sheet.
Balance sheet
In order to grow the NAV of our portfolio and deliver returns for
shareholders, HGT operates in a continual cycle of commitment, investment and
realisation of the underlying investments. This process involves continual
monitoring and revision of forecasts and estimates, as they relate to the
portfolio and the impact on HGT's balance sheet.
Consequently, the board has developed a wide range of tools to optimise the
balance sheet to fund future investment activity.
As part of this tool-kit, HGT uses 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. This will aid in the cash flow management
of HGT in what seems likely to be a more uncertain transaction environment.
As I noted in my report to you in March, the Board has adopted a revised and
improved policy as regards share buybacks and, as a result, executed one
buyback in 2022. The level of the discount on the shares is monitored daily as
part of this process, with the Board convening as guided by the process to
discuss the merits of any buyback given the level of the discount, market
conditions more broadly and the likely impact on future NAV growth and
commitment levels from any actions contemplated.
There are signs that the challenging conditions for private equity
transactions are easing somewhat as we enter the second half of the year and
noticeably in the structurally growing sectors and with the types of highly
resilient assets that align with your Company's investment strategy. Your
Board and the Manager are optimistic that the remainder of 2023 will see not
only ongoing strong performance from the portfolio but also an increase in the
pace of the new investment activity that supports long-term value creation at
HGT.
HGT portfolio management
As I noted in my previous full year report, in addition to seeking to optimise
the balance sheet through debt and equity capital markets, the Board also
looks to take advantage of market driven opportunities to manage the portfolio
construction of HGT, achieving the optimal balance of asset and vintage
exposure across the various Hg fund structures that constitute the portfolio.
As reported previously, HGT has now 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, 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 adjustments to the HGT investment profile not only allow for significant
cash to be returned to HGT at attractive valuations but allow for increased
investment, particularly through increased exposure to co-investments where
HGT has a stated goal of investing 10% -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 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 26 to 27 of the full Interim Report and
accounts.
The Hg Foundation: see page 27 of the full Interim Report and accounts.
Dividend
As a principle, your Company aims to achieve long-term growth in the net asset
value per share and in the share price as a primary goal, rather than to
deliver a specific dividend stream.
In order to maintain its status as an investment trust, HGT is not permitted
to retain more than 15% of taxable income in any given financial year.
Consequently, HGT distributes at least 85% of this taxable income each year as
a dividend.
The level of this taxable income is influenced by the capital structures of
the transactions entered into by Hg and by income received on liquid resources
held by the balance sheet.
As a result, this income can and does vary from one year to another, with a
relatively low level of predictability and this in turn has an impact on the
funds available each year for dividends.
In the Report and Accounts for the year ended 31 December 2022, your Board
indicated a full year dividend of 5.0 pence per share to be a reasonable basis
for a level that the Company should be able to sustain, given all the
aforementioned detail.
As regards the current financial year, HGT will pay an interim dividend of 2.0
pence per share (2022: 2.5 pence per share), payable in October.
The Board will communicate further guidance on the dividend to shareholders
when it is practicable to do so.
Dividend: see page 61 of the full Interim Report and accounts.
Dividend re‑investment plan: page 61 of the full Interim Report and
accounts.
Board and governance
As I noted in my previous statement, HGT is embarking on a process to find a
new Non-Executive Director to replace Anne West, who has chosen not to stand
for re-election to the Board at the next AGM in May 2024, after ten years of
service on the Board. This process is now well underway. The Nominations
Committee has defined a scope for the skills and experience which would be
most additive to the Company and an external firm of headhunters has been
engaged to support the Nomination Committee and the Board in delivering a
successful outcome to this process. The expectation is that this process will
conclude before the end of the year and any announcements will be made in due
course.
Prospects
Your Company has delivered a resilient performance over the first six months
of the year with the portfolio delivering strong underlying growth. Investment
activity has been noticeably slower in the first half of 2023 as the
prevailing high degree of uncertainty and tight capital markets conditions
combined to make transactions challenging. There are signs that these
conditions are starting to abate somewhat, and noticeably in the sectors and
with the types of assets that align with your Company's investment strategy.
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, the Company is well positioned to take advantage of
investment opportunities as they arise.
Jim Strang
Chairman
15 September 2023
Manager's update
Our portfolio continues to be driven by growth from existing customers,
supported by strong renewal rates, cross and up-sell. We enhance this with
M&A, which remains a powerful accelerant of our performance.
David Toms, Head of Research, Hg
All investments sit within Hg's sweet-spot in software and tech-enabled
services across eight industry verticals or 'clusters' as we continue to build
on Hg's position as one of the largest software groups in the world.
Luke Finch, Head of Client Services, Hg
The first half of 2023 has seen a marked improvement in investor sentiment
towards software and tech-enabled services ('S&S') in the public markets.
After stabilising in the second half of 2022, S&S multiples have rebounded
strongly in 2023, with the valuation of the largest public software index up
over 25% so far this year. We think it would be brave to extrapolate such
valuation progression into the second half of the year, given we are already
at pre-COVID valuation highs, but investor sentiment around the prospects for
software and tech-enabled services is clearly much more positive than it was
at the start of 2023.
From a trading perspective, we commented in May that "the broader backdrop is
less benign than previous years", based on the lack of growth in sector
earnings forecasts in the second half of 2022. However, the first half of 2023
has seen an improvement in this metric, with sector earnings growth forecasts
increasing by c.10% on an annualised basis over the period. As currency
headwinds abate further, we see scope for this to sustain in the second half.
Across the industry, although we have seen some companies report increasing
pressure on new business (and we are seeing some similar effects within the
portfolio), the impact of this is relatively minor. The majority of our
revenue arises from the existing customer base, where we continue to see
strong renewal rates, driven by cross and up-sell.
We can see the impact of slower new business by analysing the growth rate
expectations for US-listed public software companies. We categorise these into
'Typical Hg Businesses' with 5-15% estimated organic revenue growth, and 'High
growth, Low margin' businesses with 15%+ estimated organic revenue growth
rates. For the Typical Hg Businesses, the average growth rate expectation
since December 2020 has been remarkably stable at c.10%. In contrast, the high
growth companies, typically much more dependent on new business, have seen an
11pp reduction in growth rate expectations, from 26% to 15%. This resilience
and ability to generate growth from the existing customer base, underpins the
vast majority of our portfolio.
The biggest news item of the first half is clearly the widespread publicity
around generative AI (Chat GPT and its siblings), which has arguably been
responsible for at least some of the renewed investor enthusiasm for software.
This is not a new topic to us at Hg; in addition to a multi-year involvement
in beta programs from some of the largest industry players in Generative AI
products, our in-house data team continues to work across the portfolio on
leveraging the capabilities of data analytics, machine learning and AI in its
multiple forms. What has changed in the last six months has been the
commercially available capabilities that we can leverage through all our
businesses.
Our investment philosophy revolves heavily around the automation of business
processes, and Generative AI dramatically increases the range of processes we
can cover. In the same way that SMB accounting software enabled
non-accountants to maintain their financial statements, AI opens a wide range
of tasks up to non-specialists. Whether this will be automating graphic design
(as demonstrated by Adobe, where its beta program for an AI enabled product
saw uptake eighty-fold greater than management had expected) or legal workflow
(as we are tackling within the Hg portfolio), we are very early in the
democratisation of a wide range of additional software use cases that will
drive a material increase in overall market opportunity. Innovation, in its
multitude of forms, remains a secular long-term driver of opportunity.
Despite the Hg portfolio's positive NAV development in the first half,
investors may notice that the performance has lagged public markets over the
very short term. This is entirely a result of lower volatility in our
valuation multiples; our earnings growth is comfortably ahead of public
comparators. We use an unweighted valuation methodology (which tends to be
less volatile as it is not skewed by movements in large index constituents)
and we also include private transaction comps. As a result, we participate
neither in the mood swings of extreme euphoria and extreme depression, to
which the public markets (and particular indices) can be prone.
Furthermore, although our valuation process is based partly on public
comparators, as with our companies, the vast majority of these are profitable,
established businesses. Such businesses have shown much more limited valuation
volatility in keeping with their robust, predictable nature.
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 comps 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 doubled 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. We remain aware,
however, that events rarely align perfectly along a timeline, and there is a
risk that a combination of geopolitical challenges, fiscal tightening, supply
chain constraints, and cost increases, cause broad economic challenges to
which our portfolio's end customers may respond with temporarily lower
investment (postponing investments in systems and software), before the
structural factors that drive the need for software reassert themselves.
Looking to the second half of the year - we would be very surprised to see
H1's multiple expansion repeat in H2. 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.
Given the stability of growth and margin opportunity, we expect robust organic
earnings growth to continue.
In our view, sector sentiment is likely to be underpinned by slightly more
positive earnings reports from the US as last year's currency headwinds abate.
Beyond this, for our portfolio, M&A remains a key driver of outperformance
and we continue to execute on a strong set of opportunities.
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
portfolio companies and refinancings) each year. We believe the pace of
investment should continue at broadly this level over the medium term.
However, while we continue to see opportunities, we are in a period of reduced
activity for platform acquisitions, as seller expectations adjust and react to
the macro-outlook and in particular the new interest rate environment.
In contrast, 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. Portfolio M&A is at an
all-time high, reflecting 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 $125 billion at 30 June
2023.
Overview of the underlying investments
held through HGT's limited partnerships
Investments Fund Sector Location Vintage Residual Total Portfolio Cum.
(in order of value) cost valuation(1) value Value
£000 £000 % %
1 Access S3/G8/HGT ERP & Payroll UK 2020 149,243 290,918 12.4 12.4
2 Visma G7/S1/S2/HGT Tax & Accounting/ERP & Payroll Scandinavia 2020 89,768 208,871 8.8 21.2
3 Howden S2/HGT Insurance UK 2021 75,657 137,055 5.8 27.0
4 IFS Workwave S3/HGT ERP & Payroll Scandinavia 2022 111,901 119,514 5.0 32.0
5 Litera G8/G9 Legal & Regulatory Compliance N.America 2019 28,919 107,867 4.5 36.5
6 IRIS S1 Tax & Accounting/ERP & Payroll UK 2018 36,380 99,143 4.2 40.7
7 P&I G7/S1/HGT ERP & Payroll Germany 2020 44,156 99,130 4.2 44.9
8 Ideagen G10/G9/M3 Legal & Regulatory Compliance UK 2022 68,257 88,870 3.7 48.6
9 Septeo G9 Legal & Regulatory Compliance France 2020 38,545 79,191 3.3 51.9
10 insightsoftware S2/HGT Tax & Accounting N.America 2021 57,494 74,353 3.1 55.0
11 FE fundinfo M2/G9 Capital Mkts & Wealth Mgmt IT UK 2017 26,154 71,621 3.0 58.0
12 Sovos S2/HGT Tax & Accounting N.America 2020 54,455 60,703 2.6 60.6
13 team.blue G10/G8 Tech Services Benelux 2018 37,569 57,666 2.4 63.0
14 GGW M2/M3 Insurance Germany 2020 15,377 54,053 2.3 65.3
15 Azets G7/HGT Tax & Accounting UK 2016 20,966 53,813 2.3 67.6
16 Argus Media S1/HGT Capital Mkts & Wealth Mgmt IT UK 2020 27,384 49,830 2.1 69.7
17 Norstella M2/G9/HGT Healthcare IT N.America 2021 29,274 45,458 1.9 71.6
18 Trackunit G9 Automation & Engineering Scandinavia 2021 26,593 40,826 1.7 73.3
19 Rhapsody M2/M3/HGT Healthcare IT N.America 2018 20,814 37,056 1.6 74.9
20 MeinAuto G8 Automation & Engineering Germany 2017 25,233 36,439 1.5 76.4
21 Waystone S2 Legal & Regulatory Compliance UK 2022 38,449 36,224 1.5 77.9
22 Citation G8 Tech Services UK 2020 19,348 34,770 1.5 79.4
23 Prophix G9 Tax & Accounting N.America 2021 17,139 32,892 1.4 80.8
24 Benevity S2/HGT ERP & Payroll N.America 2021 32,124 32,456 1.4 82.2
25 Caseware G8 Tax & Accounting N.America 2020 21,255 31,996 1.3 83.5
26 Gen II G9 Capital Mkts & Wealth Mgmt IT N.America 2020 19,921 31,842 1.3 84.8
27 Intelerad G8 Healthcare IT N.America 2020 11,870 29,664 1.3 86.1
28 TeamSystem G8 Tax & Accounting/ERP & Payroll Italy 2021 10,586 29,044 1.2 87.3
29 HHA G9 Healthcare IT N.America 2021 24,035 26,682 1.1 88.4
30 Project CH S2 Tax & Accounting Germany 2021 18,393 24,877 1.0 89.4
31 DEXT S1/HGT Tax & Accounting UK 2021 15,620 23,830 1.0 90.4
32 smartTrade M2/HGT Capital Mkts & Wealth Mgmt IT France 2020 18,821 23,111 1.0 91.4
33 LucaNet G9 Tax & Accounting Germany 2022 15,649 21,601 0.9 92.3
34 Nitrogen M3/HGT Capital Mkts & Wealth Mgmt IT N.America 2021 15,868 19,652 0.8 93.1
35 GTreasury M4 Tax & Accounting N.America 2023 15,569 16,138 0.7 93.8
36 Silverfin M2/HGT Tax & Accounting Benelux 2019 10,046 15,679 0.7 94.5
37 Commify M1/HGT Tech Services UK 2017 4,080 15,451 0.7 95.2
38 Pirum M3/HGT Capital Mkts & Wealth Mgmt IT UK 2022 13,928 15,215 0.6 95.8
39 Auvesy M3 Automation & Engineering Germany 2021 8,130 14,271 0.6 96.4
40 F24 M2/HGT Tech Services Germany 2020 10,589 14,189 0.6 97.0
41 Revalize G9 ERP & Payroll N.America 2021 18,686 12,495 0.5 97.5
42 Serrala G9 Tax & Accounting Germany 2021 23,086 12,415 0.5 98.0
43 Mitratech G7/HGT Legal & Regulatory Compliance N.America 2017 3,328 12,138 0.5 98.5
44 Geomatikk M2/HGT Tech Services Scandinavia 2021 11,392 11,469 0.5 99.0
45 Fonds Finanz M3 Insurance Germany 2022 8,309 10,912 0.5 99.5
46 TrustQuay M3 Capital Mkts & Wealth Mgmt IT UK 2022 8,970 9,842 0.4 99.9
47 Bright M3 ERP & Payroll Ireland 2021 6,529 8,622 0.4 100.3
48 Blinqx M3 ERP & Payroll Benelux 2022 3,833 5,141 0.2 100.5
Total buyout investments (48) 1,409,692 2,384,995 100.5 100.5
Other Hedges and other fund interests 13,141 (12,411) (0.5) (0.5)
Total all investments 1,422,833 2,372,584 100.0 100.0
(1)Including accrued income of £136,778,000, but before a deduction for the
provision for carried interest of £198,752,000 and fund level facilities of
£362,028,000. Note that the investments held at fair within the Balance Sheet
on page 48 of the full Interim Report and accounts exclude accrued income but
include the deduction for carried interest and the fund level facilities.
Dividend
The interim dividend proposed in respect of the year ending 31 December 2023
is 2.0 pence per share.
Ex-dividend date 28 September 2023
(date from which shares are transferred without dividend)
Record date 29 September 2023
(last date for registering transfers to receive the dividend)
Last date for registering DRIP instructions 13 October 2023
Dividend payment date 27 October 2023
Further Information
HGT's Interim Report for the six months ended 30 June 2023 is available to
view on HGT's website at: https://www.hgcapitaltrust.com
(http://www.hgcapitaltrust.com) . In accordance with DTR 6.3.5(1A) of the
Financial Conduct Authority's Disclosure Guidance and Transparency Rules, it
has also been submitted in full unedited text to the Financial Conduct
Authority's National Storage Mechanism and will shortly be available for
inspection at data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism)
ENDS
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