HgCapital Trust — Flying high despite COVID-19

HgT (LSE: HGT)

Last close As at 28/03/2024

GBP4.72

−7.00 (−1.46%)

Market capitalisation

GBP2,191m

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Research: Investment Companies

HgCapital Trust — Flying high despite COVID-19

HgCapital Trust (HGT) continues to outperform its benchmark over the short and long term, with NAV total return strongly increasing c 20% in the nine months to end-September 2020 (vs a fall of c 20% for the FTSE All-Share Index in the period). Following a record amount of investments and realisations in FY20, we estimate HGT’s commitment ratio stood at 60% in mid-December (vs 48% on average between 2015 and 2019), supported by a new £200m credit facility that it secured in early October 2020. The manager expects transaction activity to remain high and highlights his confidence in the value creation potential of HGT’s software and technology portfolio, driven by the ongoing digitalisation of businesses, accelerated by COVID-19.

Milosz Papst

Written by

Milosz Papst

Director, Financials

Investment Companies

HgCapital Trust

Flying high despite COVID-19

Investment trusts

22 December 2020

Price

301.5p

Market cap

£1,250m

AUM

£1,224m

NAV*

299.5p

Premium to NAV

0.7%

*As at 30 September 2020

Yield

1.7%

Ordinary shares in issue

414.5m

Code

HGT

Primary exchange

LSE

AIC sector

Private Equity

Benchmark

FTSE All-Share Index

Share price/discount performance

Three-year performance vs index

52-week high/low

306.0p

155.0p

299.5p

236.3p

*Including income.

Gearing

Gross*

0%

Net cash*

£161m

*Liquid resources as at 18 December 2020.

Analysts

Milosz Papst

+44 (0) 20 3077 5700

Richard Williamson

+44 (0) 20 3077 5700

HgCapital Trust is a research client of Edison Investment Research Limited

HgCapital Trust (HGT) continues to outperform its benchmark over the short and long term, with NAV total return strongly increasing c 20% in the nine months to end-September 2020 (vs a fall of c 20% for the FTSE All-Share Index in the period). Following a record amount of investments and realisations in FY20, we estimate HGT’s commitment ratio stood at 60% in mid-December (vs 48% on average between 2015 and 2019), supported by a new £200m credit facility that it secured in early October 2020. The manager expects transaction activity to remain high and highlights his confidence in the value creation potential of HGT’s software and technology portfolio, driven by the ongoing digitalisation of businesses, accelerated by COVID-19.

Outperformance of benchmark year-to-date in FY20

Source: Refinitiv, Edison Investment Research

The market opportunity

HGT’s portfolio of software and services technology companies offers exposure to relatively resilient sectors (providing business-critical solutions) in the current macro uncertainty. This has been reflected in strong earnings momentum delivered by its top 20 portfolio holdings, with growth in the last 12 months (LTM) sales and EBITDA to end-September 2020 at 22% and 29%, respectively. Moreover, HGT’s performance has continued to be supported by particularly positive investor sentiment towards the tech sector, illustrated by record high valuations of software and services equities.

Why consider investing in HGT?

Investment manager’s extensive experience (nearly 30 years).

Focus on software and services companies, where HGT has a well-documented track record.

Solid top- and bottom-line performance of portfolio companies.

Value-add initiatives executed by an experienced in-house team.

Valuation: Trading at par to NAV

HGT’s shares continue trading broadly in line with its NAV, which we believe is underpinned by its strong track record and the solid long-term fundamentals of its tech and software portfolio. The shares now offer an LTM dividend yield of 1.7%.

Exhibit 1: HGT at a glance

Investment objective and fund background

Recent developments

HgCapital Trust aims to provide shareholders with consistent long-term returns in excess of the FTSE All-Share Index by investing predominantly in fast-growing, defensive unquoted companies and creating value through strategic and operational change. The company focuses on investments in software and service businesses primarily in Europe. It is able to invest in companies at enterprise values from £50m to over £1.0bn.

18 December 2020: HGT invests £7.4m in Geomatikk Group.

3 December 2020: HGT invests £27.3m in Benevity.

19 November 2020: HGT invests £40.3m in The Septeo Group.

6 November 2020: HGT exits Eucon with realisation proceeds of c £9.2m.

6 November 2020: HGT invests £19.8m in Gen II Fund Services.

2 November 2020: HGT exits STP with realisation proceeds of c £12.0m.

Forthcoming

Capital structure

Fund details

AGM

May 2021

Ongoing charges

1.6% (LTM to end-June 2020)

Group

Hg

Full-year results

15 March 2020

Net gearing

None

Manager

Hg Pooled Management (Hg)

Year end

31 December

Annual mgmt fee

1.2% of NAV (LTM)*

Address

2 More London Riverside,

London SE1 2AP

Dividend paid

Semi-annually

Carried interest

20% of aggregate profits*

Launch date

1989

Trust life

Indefinite

Phone

+44 (0)20 7089 7888

Continuation vote

2025

Loan facilities

£200m (undrawn)

Website

www.hgcapitaltrust.com

Dividend policy and history (2009–20)**

Share buyback policy and history

HGT’s current dividend policy to pay out an annual dividend of at least 4.8p per share was introduced in 2019. In October 2020, the company paid an interim dividend of 2.0p per share. For FY20, it plans to be able to deliver a total dividend of 5.0p per share.

Each year HGT’s directors renew the authority to buy back up to 14.99% of the issued share capital at prices below the prevailing NAV per ordinary share, although the company has never executed the right. A general authority to allot shares up to a maximum nominal amount of £3.1m was also given to directors.

Shareholder base (as at 22 December 2020)

Portfolio exposure by cluster (as at 30 September 2020)

Top 10 holdings (as at 30 September 2020)

Company

Location

Cluster/end-market

Portfolio weight %

30 September 2020

30 September 2019***

Visma

Scandinavia

Tax & Accounting

11.6%

21.3%

Access

UK

ERP & Payroll

7.4%

5.0%

IRIS

UK

Tax & Accounting

5.7%

5.6%

P&I

Germany

ERP & Payroll

5.3%

N/A

Litera

North America

Legal & Compliance

4.3%

3.7%

Transporeon

Germany

ERP & Payroll

4.1%

4.5%

Sovos Compliance

North America

Tax & Accounting

3.9%

8.7%

team.blue

Benelux

SME Tech & Services

3.5%

N/A

Mobility Holding

Germany

Automotive

3.2%

3.9%

Azets (formerly CogitalGroup)

UK

Tax & Accounting

3.1%

4.2%

Top 10 (% of portfolio)

52.1%

61.3%

Source: HgCapital Trust, Edison Investment Research, Bloomberg. Note: *Please see our previous update notes for further details. **Adjusted for the 10:1 share split completed in May 2019. ***N/A where not in end-September 2019 top 10.

Strong performance in the pandemic

HGT’s performance in FY20 to date continued to illustrate both the COVID-19 resilience of its software and services portfolio and positive investor sentiment towards tech companies. The company’s net asset value (NAV) total return (TR) was 19.7% in the nine months to end-September 2020, which compares with the negative 19.9% return of FTSE All Share Index in the period. Additionally, HGT has outperformed the FTSE All Share Index over the long term, with a particularly strong NAV TR of 21.3% pa over the five-year period to end-September 2020 vs 3.5% pa for the FTSE All Share Index and c 14% pa on average posted by its peers in the period.

Exhibit 2: Investment company performance to 30 September 2020

Price, NAV and index total return performance, 10-year rebased

Price, NAV and index total return performance (%)

Source: Refinitiv, Edison Investment Research. Note: Three-, five- and 10-year performance figures annualised.

Exhibit 3: Peer group comparison as at 22 December 2020

% unless stated

Market
cap £m

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Discount
(ex-par)

Ongoing charge

Perf.
fee

Net
gearing

Dividend
yield (%)

HgCapital Trust

1,250.0

22.2

76.8

162.1

296.9

0.7

1.6

Yes

100

1.7

Altamir

647.8

16.3

38.9

117.3

218.7

(29.2)

2.7

No

100

3.4

BMO Private Equity Trust

212.2

3.4

23.4

57.9

156.5

(25.4)

1.2

Yes

115

5.1

ICG Enterprise Trust

605.2

(2.1)

29.6

79.6

184.1

(21.2)

1.9

Yes

98

2.5

NB Private Equity Partners

528.4

(4.2)

24.2

74.7

N/A

(26.1)

2.1

Yes

118

4.0

Oakley Capital Investments

488.5

14.1

60.9

108.4

159.8

(23.5)

1.1

Yes

92

1.7

Princess Private Equity

704.7

13.3

40.4

116.3

170.1

(10.8)

1.9

Yes

99

3.9

Standard Life Private Equity

568.9

4.0

30.7

88.4

191.2

(24.6)

1.1

No

95

3.5

Average (excl. Hg Capital)

536.5

6.4

35.4

91.8

180.1

(23.0)

1.7

N/A

102

3.4

HGT’s rank in sector

1

1

1

1

1

1

5

N/A

4

8

Source: Morningstar, Edison Investment Research. Note: Performance to 30 September 2020. TR: total return. Net gearing is total assets less cash and equivalents as a percentage of net assets. Ongoing charge excludes carried interest. Please note that in the case of some of the peers, the ongoing charge may not fully capture the charges levied on the underlying funds.

The robust NAV TR has been reflected in HGT’s share price such that HGT is now trading at a slight premium to NAV (compared to an average peer discount at 23%). HGT’s 2020 high Principles for Responsible Investment (UNPRI) Environmental, Social, and Corporate Governance (ESG) rating of AA++ may have added further support. Over the previous two to three years HGT’s discount traded within the range of 0–10%, with the stock only occasionally moving into double-digit discount territory. This has usually coincided with major UK stock market corrections, as illustrated most recently by the market sell-off triggered by the COVID-19 pandemic. However, following this the discount to NAV closed relatively quickly.

Exhibit 4: Share price % discount to NAV over 10 years (%)

Source: Refinitiv

Increased transaction activity over recent months

Despite the COVID-19 pandemic, HGT’s transaction activity has been particularly strong in FY20, with a total of £258m investments in the first nine months of 2020 (9M20) compared to £117m in FY19 and £109m on average between 2015 and 2019. Realisations were also a record high at £431m in the period (vs £117m in FY19 and £162m on average between 2015 and 2019), see Exhibit 5.

Exhibit 5: HGT’s investments and realisations, 2006–9M20

Source: HgCapital Trust

In H120, HGT completed investments of £169m in total (see Exhibit 6), while realisations were relatively modest at £51m. Having said that, exits accelerated in Q320, reaching a notable £380m in the period. In Q320, the company deployed £89m in total, though we note that its investments in Evaluate, Sovos Compliance and Visma in the period might be considered as partial rollovers (see more details in our previous update note). HGT’s transaction activity has remained high over recent months, with investments announced and not yet completed as of end-Q320 at c £227m and realisations of c £38m, according to our estimates.

It is noteworthy that HGT posted significant uplifts to last carrying value (ranging between 18% and 60%) and initial rates of return (IRRs) (18–43%) on the exits that it has announced over recent months (see Exhibit 7). Its latest investments are companies that it has backed for many years (eg Evaluate, Sovos Compliance, Visma, The Citation Group, Access) or tracked for several years before investing (eg CaseWare, Gen II Fund).

Exhibit 6: HGT’s investment in FY20 to 21 December 2020

Company

Completion of transaction*

Business profile

Amount invested on behalf of HGT**
(£m)

Hg Fund

Argus Media

H120

Global provider of energy and commodity price reporting

34.8 (4.0)

Hg Saturn Fund

Personal & Informatik

H120

Provider of cloud-based HR software, headquartered in Germany

34.6 (5.0)

Hg Saturn Fund

Visma

H120

Provider of business-critical software to private and public enterprises in the Nordic, Benelux and Baltic regions

31.6

Hg Saturn 2 Fund

Intelerad Medical Systems

H120

Provider of medical imaging software and enterprise workflow solutions

31.2

Hg Genesis 8 Fund

smartTrade Technologies

H120

Provider of multi-asset electronic trading solutions

17.5 (10.0)

Hg Mercury 2 Fund

Achilles

H120

Provider of supply chain risk and performance management for a global network of collaborative industry communities

11.0

Transition Capital Fund

F24

Q320

Pan-European provider for emergency notifications

10.5 (2.5)

Hg Mercury 2 Fund

Evaluate

Q320

Provider of commercial intelligence and predictive analytics to the pharmaceutical industry

11.5 (2.5)

Hg Mercury 2 Fund

Sovos Compliance

Q320

Global tax software provider

47.0

Hg Saturn 2 Fund

Visma

Q320

Provider of business-critical software to private and public enterprises in the Nordic, Benelux and Baltic regions

24.3

Hg Saturn 2 Fund

Howden Group

N/A

(Q320)

International insurance intermediary

33.1

Hg Saturn 2 Fund

Access

N/A

(Q420; completion expected in Q121)

Provider of business management software to mid-market organisations

38.8

Hg Genesis 8 Fund

The Citation Group

N/A

(Q420)

Provider of tech-enabled, subscription-based HR and employment law, health & safety, and ISO services to SMEs

22.0

Hg Genesis 8 Fund

CaseWare

N/A

(Q420)

Global provider of audit and assurance software

37.8

Hg Genesis 8 Fund

Gen II Fund Services

N/A

(Q420)

Private equity fund administrator

19.8

Hg Genesis 9 Fund

The Septeo Group

N/A

(Q420)

European provider of legaltech

40.3

Hg Genesis 9 Fund

Benevity

N/A

(Q420; completion expected in Q121)

Global provider of corporate purpose cloud software

27.3

Hg Saturn 2 Fund

Geomatikk Group

N/A

(Q420)

Services provider managing ‘check-before-you-dig’ requests in Norway, Sweden and Finland (the core product is mapping of all underground infrastructure in the countries it operates)

7.4

Hg Mercury 2 Fund

Source: HgCapital Trust, Edison Investment Research. Note: *Announcement date in brackets. **Amount of co-investment (included in the total amount invested) in brackets.

Exhibit 7: HGT’s realisations in FY20 to 21 December 2020

Company

Completion of transaction*

Business profile

Amount returned to HGT (£m)

Uplift on transaction

Internal rate of return (IRR)

Money multiple (MOIC)

e-conomic

H120

European software as a service accounting solutions provider to SMEs based in Denmark

2.3

N/A

N/A

N/A

Visma

H120

Provider of businesscritical software to private and public enterprises in the Nordic, Benelux and Baltic regions

47.0

22% to end-December 2019 valuation**

29%**

4.3x**

Sovos Compliance

Q320

Global tax software provider

139.4

58% to end-March 2020 valuation

43%

5.5x

Evaluate

Q320

Provider of commercial intelligence and predictive analytics to the pharmaceutical industry

10.8

40% to end-December 2019 valuation

36%

3.1x

The Citation Group

Q320

Provider of subscription-based HR and employment law, health and safety and ISO services to SMEs

25.8

26% to end-December 2019 valuation

28%

2.8x

Visma

Q320

Provider of businesscritical software to private and public enterprises in the Nordic, Benelux and Baltic regions

146.3

22% to end-December 2019 valuation**

29%**

4.3x**

APG (A-Plan Group)

N/A

(Q320)

UK specialist insurance intermediary

17.2

18% to end-August 2020 valuation

26%

2.8x

STP

N/A

(Q420; completion expected in Q420)

DACH-based provider of legal tech solutions

12.0

60% to end-August 2020 valuation

30%

3.0x

Eucon

N/A

(Q420; completion expected in Q420)

Provider of automotive parts pricing data and claims management services

9.2

51% to end-August 2020 valuation

18%

2.5x

Source: HgCapital Trust, Edison Investment Research. Note: *Period of announcement in brackets. **Uplift, internal rate of return and cost multiple for Visma calculated after accounting for both realisations completed in FY20.

The company expects a high level of investment activity to continue and anticipates further exits in coming months. While the investment manager acknowledges that tech valuations are relatively high at the moment, it underwrites a multiples contraction in the assessment of respective investments and only pursues new deals if they meet the c 25% pa gross IRR target. With respect to exits, we note that HGT’s portfolio is relatively immature with c 66% of its investments made in 2018 or later. At the same time, it must be noted that some holdings may be from an earlier vintage because the position was rolled over from another Hg fund, with most recent examples including Evaluate, Sovos Compliance and Visma.

Coverage ratio supported by a £200m credit facility

We estimate that HGT’s coverage ratio was at a comfortable level of 60% in mid-December 2020 post the announcement of the Geomatikk Group investment (last available data), well ahead of the 13% in early July 2020 and 48% on average between 2015 and 2019. Liquid resources stood at £161m (including all announced transactions and the interim dividend paid in October 2020) and the company had access to a £200m credit facility, which remained undrawn post the Geomatikk Group transaction. HGT agreed the new facility in early October 2020 after it repaid its previous £80m credit line, which was fully drawn then.

Following the Geomatikk Group investment, HGT’s outstanding commitments declined to c £598m in mid-December 2020 from £916m in early July 2020. The manager expects that these will be drawn down over the next three to four years at a rate of c £190m pa and will likely be partly financed by cash from the realisations that it anticipates in the next 12 months. That said, we note that HGT’s liquid resources and credit facility alone post the Geomatikk Group investment (ie £361m in total) could finance its commitments for around two years assuming the above rate of drawdowns.

Exhibit 8: HGT’s historical coverage ratio

Source: HgCapital Trust, Edison Investment Research. Note: Last column at 18 December 2020, including all transactions announced to this date and the third interim dividend paid in October.

Resilience from tech and software portfolio holdings

HGT’s portfolio remains well diversified across the technology and services clusters, with the largest share being Tax & Accounting (31% at end-September 2020), followed by ERP & Payroll (22%), Legal & Regulatory Compliance (11%) and Healthcare IT (11%) (Exhibit 9). Portfolio diversification has visibly improved over recent months, with the top 10 holdings representing c 52% of the portfolio at end-September 2020, compared to c 67% at end-June 2020 and c 61% at end September 2019. This resulted, most notably, from the reduction of exposure to Visma (from c 21% at end-June 2020 to c 12% at end-September 2020) and Sovos Compliance (from c 10% at end-June 2020 to c 4% at end-September 2020) after completing exits from these companies in Q320.

Exhibit 9: Portfolio breakdown by cluster

Exhibit 10: Portfolio breakdown by geography

Source: HgCapital Trust. Note: Data at 30 September 2020.

Exhibit 9: Portfolio breakdown by cluster

Exhibit 10: Portfolio breakdown by geography

Source: HgCapital Trust. Note: Data at 30 September 2020.

HGT’s portfolio has continued to deliver strong trading figures in the COVID-19 pandemic, with the LTM revenue and EBITDA growth to end September 2020 across its top 20 holdings (representing 87% of portfolio) at 22% and 29%, respectively (which includes high-single digit organic growth). These were broadly unchanged vs end-June 2020, when LTM sales growth was 23% and LTM EBITDA growth stood at 27% for the top 20 holdings (representing 88% of the portfolio). HGT’s portfolio was valued at £1,032m at end-September 2020, up from c £900m at end-December 2019, with net unrealised gains of c £198m in the period, which was almost exclusively attributable to the impact from trading, ie growth in earnings of portfolio companies.

The average EV/EBITDA multiple for its top 20 investments was 20.9x (vs 20.6x at end June 2020) and net debt to EBITDA stood at 6.0x (vs 6.1x at end June 2020). We note that the majority of HGT’s portfolio is valued based on the LTM earnings, with forward earnings applied only in selected cases where HGT expected results for the full fiscal year to be lower.

While the manager acknowledges that some portfolio holdings may deliver year-on-year declines in organic growth during the pandemic, it also expects that the portfolio in total will deliver growth over medium and long term, with some portfolio holdings posting organic growth during the pandemic. The manager’s confidence in the value creation potential of the portfolio has been supported by the ongoing trends in digitalisation of businesses, which COVID-19 has accelerated recently. The manager continues to focus on companies that sell business-critical and non-discretionary software and services, typically with predictable business models and high levels of recurring revenues. Bolt-on acquisitions and strategic M&A remain a key focus area within its existing portfolio and several of HGT’s holdings have already signed new transactions in 2020 (eg MediFox, Access, Visma, Mitratech, Sovos and IT Relation).

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This report has been commissioned by HgCapital Trust and prepared and issued by Edison, in consideration of a fee payable by HgCapital Trust. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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General disclaimer and copyright

This report has been commissioned by HgCapital Trust and prepared and issued by Edison, in consideration of a fee payable by HgCapital Trust. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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