REG - HgCapital Trust PLC - Half-year Report and Dividend Declaration
16/09/2024 07:00
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RNS Number : 2204E HgCapital Trust PLC 16 September 2024
HgCapital Trust plc
INTERIM RESULTS FOR THE PERIOD ENDED 30 JUNE 2024
STRONG TRADING IN THE UNDERLYING PORTFOLIO CONTINUES TO DRIVE GROWTH
London, 16 September 2024: HgCapital Trust plc ('HgT'), today announces its
interim results for the period ended 30 June 2024.
HgT provides investors with a listed vehicle to invest in unquoted businesses
managed by Hg ('the Manager'), Europe's largest investor in software &
services companies.
The objective of HgT is to provide shareholders with consistent long‑term
returns in excess of the FTSE All‑Share Index by investing predominantly in
unquoted businesses where value can be created through strategic and
operational change.
This objective has been demonstrated with a 10-year share price total return
of +20.0% p.a.
Highlights over the first half of 2024 include:
¡ Strong portfolio trading continued to be the main driver of performance,
contributing to a total return NAV increase of 6.4%, closing the period at
527.9p NAV per share and net assets of £2.4 billion.
¡ Share price total return of +12.7% over the period, closing at 485.0p per
share and a market capitalisation of £2.2 billion.
¡ Discount narrowed from 13% to 7%.
¡ Continued investment, with £310 million of new and further investments by
HgT across the core investment clusters targeted by Hg; with a further
estimated £183 million of transactions signed pending closing in H2 2024.
¡ £348 million of gross realisations, with full and partial realisations at
an average uplift of 16% to carrying value; an estimated further £75 million
of realisations signed and due to complete in H2 2024.
For the third year in a row, HgT topped a list of investment companies that
would have made investors more than £1 million, if they had invested the full
annual ISA allowance in the same trust each year, according to research from
The Association of Investment Companies (AIC). Investing the full ISA
allowance annually from 1999 to 2023, a total of £306,560, and reinvesting
the dividends in HgT shares would have generated a tax-free amount of over
£2.2 million by 31 January 2024.
Jim Strang, Chairman of HgT, commented:
"HgT delivered another solid performance over the first six months of the
year, successfully navigating challenging private market conditions. The
portfolio continued to experience strong underlying trading performance over
the period with sales and EBITDA across the top 20 investments (78% of the
portfolio) growing at 19% and 26% respectively. Investment activity in
businesses continued at a pace both in the first half and post period in order
to generate good future returns to shareholders. These positive fundamentals
supported a near 13% increase in the share price over the period and a halving
of the discount to 7%."
David Toms, Head of Research at Hg, commented:
"The resilience of the Hg portfolio continues to be demonstrated by valuations
and profitability remaining stable. Hg's companies are typically characterised
by visible and greater than 90%
recurring revenues, attractive margins of over 30%, and by the ability to grow
EBITDA organically by 10 to 15% each year, with further growth coming from
M&A activity. These characteristics
provide exceptional resilience when the cycle swings downward and form a
stable platform for accelerating growth when market conditions recover."
SUMMARY performance
31 August % YTD Total 30 June 31 December % H1 Total
2024
return
2024
2023
return
NAV per share 518.5p +4.5% 527.9p 500.5p +6.4%
Share price 515.0p +19.7% 485.0p 434.5p +12.7%
FTSE All-Share Index +11.3% +7.4%
YTD 2024 H1 2024
Movement
Movement
Net Asset Value £2.4bn +£83m £2.4bn £2.3bn +£126m
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 2024, therefore the movement in unrealised
value of the portfolio to the end of August 2024 is attributable to FX only.
Performance overview
Net assets of £2.4 billion, with continued long-term outperformance of the
FTSE All-Share.
- NAV per share of 527.9p, a total annual return of +6.4% for the six
months to 30 June 2024.
- Share price total return of +12.7% over the period.
- Proposed interim dividend of 2.0p per share (2023 interim dividend
2.0p per share).
Strong double-digit growth from the top 20 portfolio:
- Revenue and EBITDA growth of 19% and 26% respectively across the top
20 investments (78% of the portfolio) over the last twelve months, EBITDA
margin of 34%.
- Valuation multiple (EV/EBITDA) of 25.9x and net debt to EBITDA ratio
of 7.4x for the top 20 investments (78% of the portfolio).
Continued portfolio activity to drive future value:
- Continued investment with £310 million invested over the period on
behalf of HgT into companies that Hg (the Manager) has known for many years
and have demonstrated a track record of strong performance across market
cycles.
- £348 million of gross realisations, including full and partial
exits.
POST PERIOD TO 31 august 2024
§ Pro forma NAV per share of 518.5p.
- The change from the 30 June 2024 NAV per share is attributable to FX
movements only. The full portfolio will be revalued at the end of September
2024.
§ Pro forma Net assets of £2.4 billion.
§ Share price of 515.0p, performance of +19.7% since 31 December 2023.
Realisations and investments
§ Realisations yet to complete in H2 2024 estimated to return c.£827 million
of proceeds to Hg clients, including c.£75 million to HgT.
§ Estimated £183 million invested by HgT, into four new investments.
Liquid resources and commitments
§ Having increased the revolving credit facility by £25 million earlier in
the year, to £375 million, the facility was c.£65 million drawn in July to
cover investment opportunities.
§ Available liquid resources post-completion of all announced transactions
and the full year dividend payable in October 2024, are £458 million (19% of
31 August pro-forma NAV).
§ Outstanding commitments of £707 million (30% 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 combination of the long-term nature of listed private equity investment
with the types of business that Hg invests in, and robust double-digit growth
in trading is expected to continue to drive long-term performance
§ Resilient trading performance underpinned by mission-critical nature of
products and services provided by portfolio companies
§ Improving deal environment is supportive of increased investment activity
§ We continue to focus on consistency of realisations, with further liquidity
events anticipated
§ We remain excited by the long-term investment opportunity, as businesses
seek to automate workflow to improve productivity and manage rising labour
costs
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.
- Ends -
HgT's 2024 Interim Report, results presentation and an animated presentation
from Hg to accompany the results are available to view at:
http://www.hgcapitaltrust.com/ (http://www.hgcapitaltrust.com/) .
For further details:
HgCapital Trust plc
George Crowe +44 (0)20 8152 5880
Laura Dixon
+44 (0)20 8078 9139
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 2024
HgCapital Trust plc (the "Company" or "HgT") announces its interim results for
the 6 months ended 30 June 2024 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
Performance over six months to 30 June 2024
The first six months of 2024 have seen continued positive performance from the
underlying portfolio companies driven by strong growth in sales and
profitability and further liquidity events over the period.
Jim Strang, Chairman, HgT
+12.7%
Share price (485.0p)
Six months ended 30 June 2023: +7.1%
£2.2bn
Market capitalisation
As at 31 December 2023: £2.0bn
+6.4%
NAV per share (527.9p)
Six months ended 30 June 2023: +4.6%
£2.4bn
Net assets
As at 31 December 2023: £2.3bn
2.0p
Interim dividend
As at 30 June 2023: 2.0p
1.6%
Total annualised ongoing charges
As at 30 June 2023: 1.6%
£310m
Cash invested on behalf of HgT
Six months ended 30 June 2023: £33m
£308m
Realisations to HgT
Six months ended 30 June 2023: £229m
£566m
Available liquid resources (23% of NAV)
As at 31 December 2023: £625m (27% of NAV)
£912m
Outstanding commitments (38% of NAV)
As at 31 December 2023: £1.2bn (53% 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'). Please see the definitions of the APM's in the
glossary pages 66 to 67 in the full Interim Report.
Top 20 investments (78% of portfolio value)
A snapshot as at 30 June 2024
The resilience of the Hg portfolio continues to be demonstrated by valuations
and profitability remaining stable. Hg's companies are typically characterised
by visible and greater than 90% recurring revenues, attractive margins of over
30%, and by the ability to grow EBITDA organically by 10 to 15% each year,
with further growth coming from M&A activity. These characteristics
provide exceptional resilience when the cycle swings downward and form a
stable platform for accelerating growth when market conditions recover.
David Toms, Head of Research, Hg
25.9x
EV to EBITDA multiple
31 December 2023: 26.1x
7.4x
Net debt to EBITDA ratio
31 December 2023: 7.4x
£11.5bn
LTM revenues
30 June 2023: £10.0bn
£3.5bn
LTM EBITDA
30 June 2023: £3.0bn
+19%
LTM sales growth
30 June 2023: +29%
+26%
LTM EBITDA growth
30 June 2023: +30%
34%
EBITDA margin
30 June 2023: 30%
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. Figures are based on the Top 20 investments as at
the balance sheet date and therefore can change year on year.
Chairman's statement
HgT delivered another solid performance over the first six months of the year,
successfully navigating challenging private market conditions. The portfolio
continued to experience strong underlying trading performance over the period
with sales and EBITDA across the top 20 investments (78% of the portfolio)
growing at 19% and 26% respectively. Investment activity in businesses
continued at a pace both in the first half and post-period in order to
generate good future returns to shareholders. These positive fundamentals
supported a near 13% increase in share price over the period and a halving of
the discount to 7%.
Jim Strang
Chairman, HgT
The first half of 2024 has been one of continued good progress for HgT,
maintaining the momentum reported in the Q1 results and the annual results for
2023. The deal markets for private equity transactions continue to gradually
improve, aided by improving investor confidence and more accommodative
conditions in credit markets. As I noted in the full-year results
announcement, the kind of high-quality software assets that make up the
majority of the HgT portfolio continue to be viewed as some of the most
attractive areas to invest across private markets and to transact at
significant multiples.
The portfolio, which numbered 50 businesses at 30 June, has continued to trade
well over the last six months, reflecting the characteristics of the types of
companies targeted for investment by the Manager ('Hg'). Hg continues to
refine and enhance its in-house value creation capability, notably around the
important topic of Artificial Intelligence, and in growing the strength of the
investment team globally. Given the discipline and rigour of the investment
approach and the health of both the portfolio and the HgT balance sheet, the
Board maintains its positive outlook going forward.
Highlights to 30 June 2024 included:
• 12.7% total share price return
• 6.4% NAV per share growth on a total return basis, with net assets of
£2.4 billion
• Discount narrowed from 13% to 7%
• LTM revenue and EBITDA growth of 19% and 26% for the top 20 companies
(78% of the portfolio)
• Investments of £310 million and gross realisations of £348 million
• £566 million of liquid resources available, including an undrawn
banking facility of £375 million
• £912 million of outstanding commitments across the Hg fund platform to
be invested over the next three to four years
Performance
The NAV of HgT increased by 6.4% on a total return basis over the first half
of 2024, reflecting the ongoing strength of the operating performance of the
HgT portfolio. HgT's share price saw a total return of 32.8% over the last 12
months, with 12.7% over H1 2024. On a long-term basis, HgT has seen a CAGR on
a total return basis of 16.6% p.a. over the past 20 years, outperforming the
FTSE All Share index by 9.3% p.a. over the same period.
The total net assets of HgT at 30 June 2024 were £2.4 billion, an increase of
c.£126 million over the reported figures at 31 December 2023. An analysis of
NAV movements and movement within the underlying portfolio is set out on pages
29 and 30 of the full Interim report.
At the end of June 2024, the HgT portfolio consisted of 50 investments, all of
which sit within the Hg sector focus and investment strategy, targeting
mission-critical software and services businesses. These assets have continued
to perform well in aggregate and in line with the portfolio growth seen in
recent years. The top 20 underlying companies (78% of the portfolio) continued
to deliver double-digit revenue growth over the last 12 months of 19% (June
2023: 29%) and EBITDA growth of 26% (June 2023: 30%), reflecting the
defensive-growth nature of the businesses in which HgT is invested. The
portfolio continues to generate strong top-line growth and solid
profitability, with the top 20 companies reporting an average EBITDA margin of
34%. Currently, 95% of the portfolio by value is held above its original cost
of acquisition, a testament to the asset selection and value creation skills
of the Manager.
These businesses typically exhibit highly predictable forward cash flows and
are appropriately financed, including significant covenant flexibility around
their financial structures. The top 20 investments have seen a weighted
average net debt to EBITDA ratio of 7.4x (December 2023: 7.4x), which is
consistent with the highly recurring revenues of the businesses that make up
the Hg portfolio and is typical for large, high quality software assets in
general. Given the average valuation multiple for the top 20 portfolio
companies is 25.9x EV-to-EBITDA (December 2023: 26.1x), this implies that debt
accounts for less than 30% of the portfolio company capital structures. This
allows a significant equity cushion within the portfolio reflecting the
Manager's prudent approach to leveraging and consistent with similar peer
companies in the market. Hg has a dedicated capital markets team which
continually monitors and manages the capital structures of the underlying
portfolio companies to ensure they are as robust and flexible as possible in
terms of tenor, interest cost and time to maturity.
As I have noted in the past, HgT aims to achieve long-term growth in the net
asset value per share and in the share price, rather than to deliver a
specific dividend yield. As regards the current financial year, HgT will pay
an interim dividend of 2.0 pence per share (2023: 2.0 pence per share),
payable in October.
Dividend: see page 63 of the full Interim report.
Dividend re‑investment plan: page 63 of the full Interim report.
Realisation activity over the first half of 2024 and post-period saw HgT
generate material cash proceeds from exits at prices in excess of the carrying
value of investments. These sale proceeds will be reinvested into businesses
which continue to align with the well proven Hg investment model. With a
performing portfolio, an attractive deal pipeline and a well capitalised
balance sheet, HgT remains well positioned for second half of the year.
Investments and realisations
In order to grow the NAV of the portfolio, and to deliver returns for
shareholders, HgT operates in a continual cycle of commitments, investments
and realisations.
Investment activity was robust over the first half of the year, with a total
of £310 million of new and further capital deployed within the first six
months of the year, including Visma, IRIS, GGW, CUBE, CINC and Induver.
Follow-on investments to finance bolt-on M&A is an area which the Manager
has highlighted as particularly attractive in the current environment and
where the sector-leading businesses across the portfolio can further improve
their market positions, product and service offering.
Further investments announced both in the period and post 30 June included
AuditBoard, Focus Group, CTAIMA and e-coordina and more recently Ncontracts.
On completion, these transactions will represent c.£183 million of further
investment by HgT.
The Board expects to see further co-investment activity (free of management
fees and carried interest), over the next twelve months. HgT currently has 7%
of net assets in co-investment and aims to grow this to 10-15% of NAV over the
next few years in line with stated policy. Increasing allocation to
co-investments allows HgT to more fully utilise its available liquid
resources, to improve returns and to reduce the overall fee load for
shareholders.
As I have noted in previous reports, the Hg investment model is based around
supporting portfolio companies to achieve their full potential and in creating
larger, more valuable and attractive businesses. As a result of this work,
these are much sought after businesses in the markets in which they operate.
Consequently, despite the challenging market conditions, Hg was able to
deliver a number of liquidity events over the last year, which included the
full and partial exits of, IRIS, GGW, Argus and Visma. In total, realisations
returned £308 million to HgT.
Post-period, HgT estimates proceeds of £75 million to be returned from the
realisations of F24, TeamSystem and team.blue. Over the past 10 years, full
and partial realisations in software and services, including all announced
transactions at the point of this report have generated an average uplift of
35% to the latest carrying value at signing. Valuations remain an area of
continued focus for the HgT Audit Valuation and Risk Committee ('AVRC'), with
the long term record of continued exit above recent holding values providing
comfort.
Realisation activity continues to set Hg apart as the industry continues to
find generating liquidity events challenging, highlighting the fundamental
strengths and attractiveness of the underlying portfolio to both trade and
financial buyers. Hg believes its exit activity, with more than 40 liquidity
events since the start of 2022 has been a clear differentiator, highlighting
the fundamental strengths and attractiveness of the underlying portfolio to
both trade and financial buyers.
Please refer to pages 35 to 38 of the full Interim Report for further
information on portfolio transaction activity.
Capital Allocation
As part of the Board of HgT's commitment to shareholders, our primary
objective is to maximise investment returns through a disciplined approach to
the allocation of available liquid resources. This incorporates the continual
monitoring by the Board, working with the Manager, of forecast cash flows and
estimated returns. As I have stated in past reports, the Board continually
seeks ways to improve the effectiveness of governance. As part of this
process, much attention has been devoted, and shareholder feedback garnered,
on the topic of capital allocation. The approach, framework and tools adopted
are set out below.
Investments
At the core of the capital allocation policy is the imperative to continue to
drive compelling investment returns for shareholders. As you will be aware,
HgT has delivered very strong shareholder returns to investors over a period
of more than two decades, a fact recently highlighted by the AIC.
The Board seeks to maintain this long-term record by continuing to access the
repeatable returns delivered by the Hg investment platform since inception.
HgT's commitments to Hg funds ensure that HgT maintains exposure to Hg's deal
flow, which is the single biggest driver of investment opportunities with the
potential to generate long-term returns. As such, the first priority of the
Board is to ensure that HgT is positioned to access these returns to the
fullest extent possible, at acceptable levels of risk. This includes
co-investment opportunities (free of management fees and carried interest), as
previously mentioned, in what is anticipated to be an attractive investment
environment.
Buybacks
From time to time, market conditions can create divergence between the share
price of HgT and its stated net asset value. The Board, the Manager and HgT's
broker monitor such divergence closely, following a clearly defined share
buyback policy. The Board has developed a process with a number of 'triggers'
set by absolute and relative level of share price discount over various time
periods. Where two or more such 'triggers' are activated, the Board is
informed and a decision is taken as to whether to allocate resources to buying
back shares. Any such buybacks are viewed with suitable caution, reflecting
the relative merits of any immediate gain with the considerable impact that
utilising current cash has on long term NAV growth.
Dividends
With regard to the level of dividend payments, as I have stated in the past,
HgT's ability to pay dividends is increasingly driven by the levels of income
that are generated by the Hg portfolio. This is a somewhat unpredictable
exercise from one year to the next and thus the view of the Board is to
establish what it considers a reasonable basis for a 'floor' for the annual
dividend level which is currently set at 5 pence per share. Should
circumstances change, I will of course communicate with shareholders at the
appropriate time.
Debt facility
The final element of the capital allocation policy relates to the use of
leverage. HgT uses a Revolving Credit Facility of £375 million at the end of
June 2024, to support the implementation of the investment strategy.
Balance sheet
A key role of the Board is continually to balance considerations of HgT's
future commitments to Hg funds, balance sheet and cash position, while
maintaining a clear focus on risk. This is a continuous cycle of activity
which has to adapt to unpredictable events. In the last year, HgT has invested
in upgrading the tools used to manage this process, aligning them with similar
tools that Hg, the Manager, uses to manage its own investment activity. As a
result, the Board benefits from being able to assess the various scenarios
with a greater degree of granularity which should benefit the quality of
decision making.
As one of the tools used to manage the balance sheet, HgT has a revolving
credit facility to support the investment programme and to improve balance
sheet efficiency. In 2024, HgT increased its facility to £375 million, being
c.15% of NAV, consistent with the historical sizing of this facility. This
will aid HgT's future cash flow management.
HgT continues to benefit from a unique opt out clause within its underlying
investment agreements with Hg (please refer to business model on page 14 of
the full Interim Report for further detail), which provides a useful risk
management tool for the Board in managing and optimising the HgT balance
sheet.
Impact and responsible investment
Your Board and the Manager, Hg, continue to increase their focus on the topics
of ESG and sustainability. We share a firmly held view that not only should
the financial returns to you, the shareholders, be attractive, but these must
be delivered in a manner which is consistent with our responsibility to
society. As a technology investor, we understand the need to ensure that those
businesses in which we invest reduce their carbon footprint and contribute to
tackling climate change.
The UN Principles for Responsible Investment (UNPRI) assessment of Hg's
approach to responsible investment is 4* (82/100) for Investment Stewardship
Policy and 5* (100/100) for Private Equity, and the Board of HgT meets
regularly with the Hg Responsible Investment team to ensure that Hg's work is
well understood and endorsed by the Board. As we have previously reported, Hg
launched The Hg Foundation in 2020 - a charitable initiative to provide
funding and operational support to initiatives across Europe, the UK and the
US. The Hg Foundation's goal is to have an impact on the development of those
skills and learning most required for employment within the technology
industry, focusing on individuals who might otherwise experience barriers to
access this education. This Foundation is funded by the Hg management company
and its team members.
Responsible Investment: see page 25 of Hg's review in the full Interim Report.
The Hg Foundation: see page 26 of Hg's review in the full Interim Report.
Reporting and Transparency
As mentioned in the 2023 Annual Report, the Board continues to look at ways to
increase the effectiveness of communications for shareholders.
In the case of improving transparency, shareholders will know that we are now
providing preliminary trading updates, which provide our shareholders with
earlier guidance on the performance of HgT ahead of the full year and interim
results, after approval by the HgT Audit Valuation and Risk Committee ('AVRC')
and the HgT Board.
Over the past six months, you will have also seen a greater focus on improving
our website, our reporting materials and our public engagement through
enhanced social media activity. Additionally, the capital markets day in June
saw record numbers of attendees and it was received very positively. These
initiatives seek to build good quality and open communication with our
stakeholders.
As we have stated before, this continued development in communications has
also seen HgT engage with third party marketing specialists to increase the
scope and span of brand marketing activities for HgT in the UK and overseas,
where regulations permit.
Board and governance
As I noted in March, Anne West retired from the Board at the AGM in May 2024,
after ten years of service. On behalf of myself and my fellow Directors, and
as previously stated, I would like to thank Anne for her important
contribution to HgT throughout her time on the Board. Following Anne's
departure, Erika Schraner has been appointed Senior Independent Director and
Helena Coles has taken on the role of Chair of the Management Engagement
Committee.
In late 2023 we commenced the process to find a new Non-Executive Director and
an external search firm was engaged to support the Nomination Committee and
the Board in delivering a successful outcome to this process, noting the
skills and experience which would be most additive to HgT.
We were pleased to announce in May the appointment of John Billowits to the
Board. John has over 25 years of operational experience and a wealth of
investment expertise in the software sector, and brings valuable international
perspective, through his past roles and current appointments on Boards of US,
Canadian and European software companies. As past CFO and CEO, and as a
Chartered Accountant, John has significant depth of financial knowledge and
experience.
John is a highly regarded investor and operator in the software sector and
brings a unique combination of skills and personal strengths that are highly
complementary to HgT and we are delighted he has chosen to join the Board.
Nomination Committee report see page 104 of the 2023 Annual Report governance
section
Prospects
Following on from the resilient performance over 2023, HgT has continued to
see positive returns over the first half of 2024, including share price
appreciation, with the underlying portfolio continuing to deliver strong
growth. Investment activity has accelerated over the period, as conditions
improved from 2023 and as the industry looked favourably on the kinds of
high-quality assets that make up the HgT portfolio.
The significant liquidity generated year-to-date, not only validates the
valuation 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 its defensive portfolio of companies and prudent management
of the balance sheet, HgT is well positioned to take advantage of investment
opportunities as they arise, and the Board remains positive for both
transaction activity and portfolio performance in the year ahead.
Jim Strang
Chairman
13 September 2024
Manager's update
As long-term technology investors, we've seen various technology waves over
the past three decades, and one feature recurs every time. The world might
overestimate the speed of change, but it also underestimates the scale of
change.David Toms
Head of Research, Hg
The first half of 2024 saw the broad software industry continue to deliver a
strong performance for earnings forecasts, with c.20% annualised increase in
Next Twelve Months ('NTM') forecast Earnings Per Share ('EPS'). This remains
an acceleration from the decade-average of 13% NTM EPS growth, and in our view
reflects an ongoing focus on margins from most of the software industry. Our
analysis shows slight softening of organic revenue growth of c.2% across the
basket of public companies we track with a profile similar to those in which
Hg typically invests, over the past two years. Margin expansion has more than
counteracted this and continues to drive earnings growth well ahead of revenue
growth.
The Hg portfolio maintained its long-term trend of outperformance against the
broader industry. The top 20 investments saw EBITDA growth of 26% which
resulted from a healthy combination of 19% revenue growth plus some modest
margin expansion. Both revenue and earnings have been underpinned by a broadly
equal mix of organic growth and M&A.
In recent periods we have commented that we did not expect 2023's multiple
expansion to persist and this was indeed the case in the first half of 2024.
Public market multiples were relatively stable in the period (although they
have been somewhat more volatile post the period end). This multiple stability
was another trend that repeated across the portfolio, thus our investment
performance for the period is the result of earnings performance, the ultimate
arbiter of long-term outcomes, as we have previously demonstrated.
Following the last two years of strong exit and liquidity activity, we have
crystallised much of the positive performance of our more mature fund
vintages, substantially de-risking these funds and providing further
validation of the valuations at which we hold our portfolio companies. All Hg
fund vintages from 2012 to 2018 rank in the top quartile for Distributed to
Paid-In Capital ('DPI') when compared to peers. As a result, the first half of
2024 has seen our collective efforts tilt somewhat towards new investment
activity, with three new investments in the period, and two more signed
immediately after the period end . We believe that activity-levels are
steadily accelerating both for Hg funds and more broadly in the market.
Looking to the remainder of 2024, we remain of the view that multiples are
unlikely to expand. Recent weeks have seen increased volatility in public
markets, particularly influenced by currency movements. Whilst these have a
limited direct impact on the portfolio, we have a watchful eye on the general
macroeconomic picture and will continue to manage the interplay of revenue
growth and margins in order to best drive long-term value.
Trading remains relatively robust, although headwinds to growth have increased
slightly over the past six months. In particular, lower inflation means that
even if real growth rates are sustained, nominal (i.e. reported) growth sees a
couple of percentage points of drag on nominal organic growth. However, we
should contextualise this for the kind of businesses we own, because it might
not align with how other, more generalist investors, describe the environment.
The vast majority of our revenue arises from the existing customer base, which
typically is enough to drive modest growth even absent any new business.
Previous cycles have shown that B2B software follows a late cycle, with a very
muted effect of economic slowdown as software purchase / upgrade decisions are
modestly deferred or scaled back. For our portfolio, when life gets a bit
tougher and new business slows, or inflation falls, the actual impact on
organic growth is much more limited.
Lower inflation is benefiting the debt financing environment. We have taken
advantage of this opportunity to reprice/refinance a significant proportion of
our debt packages this year, leading to $140 million of annualised interest
saving across the portfolio. We have no maturities for the next two years, and
80% of debt has over three years to run.
We continue to be alert to opportunities and challenges arising from GenAI. It
was, once again, the key focus at Hg's annual Software Leadership Gathering in
Lucerne in June. Our speaker list this year featured several senior figures
from the transatlantic software industry and focussed on looking for
opportunities resulting from GenAI. The discussions we hosted re-inforced
our belief that established software companies are so valuable because of
their sector IP, accumulated experience, customer relationships, and data; all
of which enable them to deliver the best possible customer propositions at the
lowest cost when using modern tools. The GenAI opportunity will not displace
much of what our portfolio companies do for their customers, instead it will
create meaningful opportunities to do it better or more efficiently.
Live examples of GenAI success in the portfolio continue to increase - doing
things more efficiently (one of Visma's businesses is now automating 90% of
support queries) and doing them better. There are more than 250 GenAI
automation efficiency projects underway within the portfolio today. We're
also seeing early revenue from AI-enabled products - for example, customers
paying a clear premium for automated invoice capture.
As long-term technology investors, we've seen various technology waves over
the past three decades, and one feature recurs every time. The world might
overestimate the speed of change, but it also underestimates the scale of
change. Put another way, markets and products won't evolve much in one year,
but they will in ten years. Our role is to invest deeply in our capabilities
and understanding to support the kinds of workflow companies that Hg backs to
leverage this next generation of automation into their customers.
We remain active in generating liquidity, with a cumulative 40 events since
the start of 2022, including 7 in the first half of 2024.
Luke Finch
Head of Client Services, Hg
Activity levels
Investment Committee activity continued its acceleration; the first half of
2024 saw almost twice as many meetings as in the comparator period in 2023.
The run rate is at a level that historically has proven appropriate to deliver
our long-term average goal of 10 to 12 investments a year. Given the period
over which we track potential investments, rising IC activity takes time to
convert to new closed deals, and we remain very sensitive to investment
quality in a recovering market. Nevertheless, we are encouraged by the
volume of activity and are starting to see this flow through to investments.
We remain active in generating liquidity, with a cumulative 40 events since
the start of 2022, including 7 in the first half of 2024. In our view, this
shows the sustained robust level of investor demand for high quality software
and services businesses. As noted above, cash returns remain the best evidence
of the reliability of our valuations, and the quality of our businesses.
M&A within the existing portfolio is a strong source of value creation.
Deal volumes have accelerated over the past three years, and remain at a high
level - over 300 transactions a year. The valuations for such investments tend
to be materially lower than those of the platform companies that are acquiring
them, providing an attractive source of enhanced returns. Of similar
importance are the operational opportunities that this M&A enables as the
platform company is able to drive both revenue growth and cost synergies.
Overview of the underlying investments held through HgT's limited partnerships
Investments Fund Sector Location Year Residual Total Portfolio Cum.
(in order of value) cost valuation(2) value Value
£000 £000 % %
1 Visma S1/S2/S3/HGT Tax & Accounting/ERP & Payroll Scandinavia 2024 205,767 334,709 12.7 12.7
2 Access S3/G8/HGT ERP & Payroll UK 2020 160,266 308,995 11.7 24.4
3 IFS S3/HGT ERP & Payroll Scandinavia 2022 115,939 141,361 5.3 29.7
4 Howden S2/HGT Insurance UK 2021 60,909 138,158 5.2 34.9
5 Litera G8/G9 Legal & Regulatory Compliance N.America 2019 28,919 133,178 5.0 39.9
6 Septeo G9 Legal & Regulatory Compliance France 2020 53,671 120,527 4.5 44.4
7 Ideagen G10/G9/M3 Legal & Regulatory Compliance UK 2022 66,448 94,433 3.5 47.9
8 team.blue G10/G8 Tech Services Benelux 2022 38,078 92,889 3.5 51.4
9 P&I S1/HGT ERP & Payroll Germany 2020 41,307 88,942 3.3 54.7
10 IRIS S3/HGT Tax & Accounting/ERP & Payroll UK 2024 75,381 83,163 3.1 57.8
11 insightsoftware S2/HGT Tax & Accounting N.America 2021 53,056 82,056 3.1 60.9
12 FE fundinfo M2/G9 Fintech UK 2021 26,229 73,909 2.8 63.7
13 Sovos S2/HGT Tax & Accounting N.America 2020 49,593 72,397 2.7 66.4
14 Trackunit G9 Automation & Engineering Scandinavia 2021 26,593 51,469 1.9 68.3
15 Caseware G8 Tax & Accounting N.America 2020 21,255 46,612 1.8 70.1
16 Benevity S2/HGT ERP & Payroll N.America 2021 32,124 44,091 1.7 71.8
17 GGW S3 Insurance Germany 2024 43,767 43,694 1.6 73.4
18 Rhapsody M2/M3/HGT Healthcare IT N.America 2022 20,814 43,531 1.6 75.0
19 Citation G8 Tech Services UK 2020 18,890 42,690 1.6 76.6
20 Azets G7/HGT Tax & Accounting UK 2016 26,505 40,187 1.5 78.1
21 Waystone S2 Legal & Regulatory Compliance UK 2022 40,904 40,058 1.5 79.6
22 Norstella G9/M2 Healthcare IT N.America 2021 24,730 39,431 1.5 81.1
23 Gen II G9 Fintech N.America 2020 19,921 38,515 1.4 82.5
24 HHA G9 Healthcare IT N.America 2021 24,035 33,160 1.2 83.7
25 smartTrade M2/HGT Fintech France 2020 18,862 30,980 1.2 84.9
26 Project CH S2 Tax & Accounting Germany 2021 18,337 30,407 1.1 86.0
27 Prophix G9 Tax & Accounting N.America 2021 12,458 29,573 1.1 87.1
28 DEXT S1/HGT Tax & Accounting UK 2021 15,620 28,278 1.1 88.2
29 Lucanet G9 Tax & Accounting Germany 2022 15,649 27,817 1.0 89.2
30 TeamSystem G8 Tax & Accounting/ERP & Payroll Italy 2021 7,447 23,065 0.9 90.1
31 Intelerad G8 Healthcare IT N.America 2020 11,870 20,909 0.8 90.9
32 CINC M4/HGT Tax & Accounting N.America 2024 19,235 20,495 0.8 91.7
33 Athletic Sport Sponsoring G8 Automation & Engineering Germany 2017 15,343 18,732 0.7 92.4
34 F24 M2/HGT Tech Services Germany 2020 11,291 17,814 0.7 93.1
35 Pirum M3/HGT Fintech UK 2022 13,928 17,654 0.7 93.8
36 Geomatikk M2/HGT Tech Services Scandinavia 2021 11,392 17,602 0.7 94.5
37 GTreasury M4/HGT Tax & Accounting N.America 2023 15,008 16,922 0.6 95.1
38 Auvesy M3 Automation & Engineering Germany 2021 8,130 16,526 0.6 95.7
39 Nitrogen M3/HGT Fintech N.America 2021 15,868 13,941 0.5 96.2
40 Fonds Finanz M3 Insurance Germany 2022 8,309 13,843 0.5 96.7
41 Mitratech G7/HGT Legal & Regulatory Compliance N.America 2017 3,328 13,685 0.5 97.2
42 Bright M3 ERP & Payroll Ireland 2021 6,529 11,696 0.4 97.6
43 Quantios M3 Fintech UK 2022 8,970 10,929 0.4 98.0
44 Revalize G9 ERP & Payroll N.America 2021 18,839 10,916 0.4 98.4
45 Serrala G9 Tax & Accounting Germany 2021 23,086 10,771 0.4 98.8
46 CUBE M4 Legal & Regulatory Compliance UK 2024 10,031 10,312 0.4 99.2
47 Blinqx M3 ERP & Payroll Benelux 2022 6,729 9,623 0.4 99.6
48 Nomadia M3 ERP & Payroll France 2023 6,935 8,426 0.3 99.9
49 JTL M4 ERP & Payroll Germany 2023 7,559 8,254 0.3 100.2
50 Induver M4 Insurance Benelux 2024 6,571 6,924 0.3 100.5
Total buyout investments (50) 1,592,425 2,674,249 100.5 100.5
Other Hedges 8,982 (12,581) (0.5) (0.5)
Total all investments 1,601,407 2,661,668 100.0 100.0
(1) Where re-investment has occurred the investment date is based on the
closing of the largest tranche of the investment holding.
(2) Including accrued income of £108.1 million, but before a deduction for
the provision for carried interest of £200.2 million and fund level
facilities of £348.7 million. Note that the investments held at fair within
the Balance Sheet on page 50 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 2024
is 2.0 pence per share.
Ex-dividend date 26 September 2024
(date from which shares are transferred without dividend)
Record date 27 September 2024
(last date for registering transfers to receive the dividend)
Last date for registering DRIP instructions 11 October 2024
Dividend payment date 25 October 2024
Further Information
HgT's Interim Report for the six months ended 30 June 2024 will be available
today on www.hgcapitaltrust.com (http://www.hgcapitaltrust.com/)
It will also be submitted shortly in full unedited text to the Financial
Conduct Authority's National Storage Mechanism and will be available for
inspection at data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism) in accordance
with DTR 6.3.5(1A) of the Financial Conduct Authority's Disclosure Guidance
and Transparency Rules.
ENDS
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