Strong momentum continues

HgCapital Trust 9 June 2021 Update
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HgCapital Trust

Strong momentum continues

Investment trusts
Private equity funds

9 June 2021

Price

338.0p

Market cap

£1,458m

NAV

£1,438m

NAV*

336.3p

Premium to NAV

0.5%

*As at 31 March 2021.

Yield

1.5%

Ordinary shares in issue

431.4m

Code/ISIN

HGT/GB00BJ0LT190

Primary exchange

LSE

AIC sector

Private Equity

52-week high/low

353.0p

230.0p

336.3p

236.3p

*Including income.

Gross gearing

13.9%

Net cash**

£136m

*At 31 March 2021.

*Liquid resources at 12 May 2021

Fund objective

HgCapital Trust’s investment objective is to achieve long-term capital appreciation by indirectly investing in unquoted companies. It does this through its investments in fund partnerships, mostly in the UK and Europe.

Bull points

Focus on resilient software and services companies.

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

Experienced investment team with strong long-term track record.

Bear points

High valuations in the software and services sector.

Ample dry powder in the market translating into strong competition for quality assets.

A significant increase in SME defaults may reduce net client additions across HGT’s portfolio.

Analysts

Milosz Papst

+44 (0)20 3681 2519

Richard Williamson

+44 (0)20 3077 5700

HgCapital Trust is a research client of Edison Investment Research Limited

HgCapital Trust (HGT) posted a strong NAV TR of 8.4% in Q121, driven primarily by double-digit earnings growth across the portfolio (LTM EBITDA for top 20 holdings up 30% y-o-y). After record-high transaction volumes in FY20 (investments at £403m and realisations at £364m), HGT has maintained a high transaction activity to date in 2021 (£147m and £112m, respectively). Its coverage ratio was a healthy 69% at 12 May 2021, supported by tap equity issues, which totalled c £50m to 8 June 2021 (versus £25m in FY20), and a £200m credit facility agreed in Q420, which remains undrawn.

HGT’s strong uplifts to book value on major exits in 2020 and 2021

Source: HgCapital. Note: Uplifts from 2020 and 2021 deals are versus book value at end-2019 and end-2020, respectively.

Why invest in HgCapital now?

HGT’s portfolio companies continue to benefit from the ongoing digitalisation of the economy, accelerated recently by the pandemic. HGT’s transaction activity has been high in 2021 to date and Hg (HGT’s manager) expects further investment and liquidity events over the next 12 months. While valuations in the tech sector remain demanding, we believe that top sponsors such as Hg may still benefit from their strong financial positions, extensive deal origination networks, in-house value creation teams and the ability to pursue a ‘buy-and-build’ strategy.

The analyst’s view

HGT focuses on the software and services sector, which has been one of the most sought-after industries (S&P 500 Software and Services index up 52% over the 12 months to end-March 2021). This has resulted in overall demanding public valuations. At the same time, HGT’s shares are trading broadly in line with NAV (vs a c 20% average discount for PE peers, although in line with HGT’s historical trading). However, we note that HGT’s recent NAV TR has been mostly driven by earnings momentum across portfolio companies rather than public market multiples. Moreover, the company continues to report healthy uplifts to last carrying value on exits, suggesting a relatively conservative portfolio valuation policy. The broader software and services market remains supportive for HGT’s portfolio, with the S&P 500 Software and Services Index (which historically has been a good valuation proxy for Hg’s portfolio) up 7% since end-March 2021 to 8 June 2021.

Performance driven by robust trading

HGT posted a strong 8.4% net asset value (NAV) total return (TR) in Q121, driven primarily by double-digit earnings growth across portfolio companies. HGT’s top 20 investments (representing c 82% of HGT’s portfolio) delivered last 12 months (LTM) EBITDA growth of 30% yoy at end-March 2021 (vs 31% at end-December 2020) and LTM sales growth of 20% y-o-y (22%), according to the manager. The average LTM EV/EBITDA for the top 20 investments increased slightly to 23.1x at end-March 2021 from 22.1x at end-2020, contributing to NAV TR in Q121, although to a lesser extent.

We believe that one of the value drivers in Q121 was MeinAuto (a German online car trader); its valuation increased significantly to c £89m at end-March 2021 (c 6.2% of HGT’s NAV at this date) from c £39m at end-2020 (3.1%). MeinAuto announced in March 2021 its plans to list on the Frankfurt Stock Exchange. The IPO was initially scheduled for Q221, but the company decided to postpone it citing ‘adverse market conditions for growth companies’. At the same time, we understand (based on MeinAuto’s press releases) that it remains committed to listing on the Frankfurt Stock Exchange once market conditions stabilise.

Finally, the manager highlights that HGT’s NAV TR in Q121 was supported by uplifts on exits, which included full realisations from A-Plan Group (£21.5m, with an uplift to last carrying value of 18%) and TeamSystem (£21.4m, uplift not available), as well as a refinancing at team.blue (£10.3m).

Exhibit 1: Changes in HGT’s portfolio valuation between end-FY20 and end-Q121

Source: Hg Capital. Note: *Net acquisitions is difference between acquisitions and disposals at last carrying value.

HGT’s NAV TR was c 43% over 12 months to end-March 2021, which compares with a c 27% rise of the FTSE All-Share Index and a c 66% y-o-y increase of the LPX Europe Listed Private Equity Index (on a TR basis). We acknowledge that these growth rates were generated from a low base at end-March 2020 amid the COVID-19 outbreak. That said, HGT’s NAV TR between end-December 2019 (pre-pandemic) and end-March 2021 was also healthy at c 27% versus a negative c 4% for the FTSE All-Share and a positive c 12% for LPX Europe Listed Private Equity Index over the same period.

HGT’s longer-term NAV TR, which is the best indication of private equity (PE) fund performance, has been visibly above the FTSE All-Share and LPX Europe Listed Private Equity Index, with the three-year NAV TR at c 23% (vs c 3% for FTSE All-Share and 11% for LPX Europe Listed Private Equity Index) and the five-year NAV TR to end-March 2021 at c 21% (c 6% and c 13%, respectively). HGT’s NAV TR to end-March 2021 was above its peers over one, three, five and 10 years (Exhibit 2).

Exhibit 2: Investment trust performance to 31 March 2021

Price, NAV and benchmark total return performance, one-year rebased

Price, NAV and benchmark total return performance (%)

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

Exhibit 3: Selected peer group at 31 March 2021*

% unless stated

Market cap £m

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Ongoing
charge

Perf.
fee

Discount
(cum-fair)

Net
gearing

Dividend
yield

HgCapital Trust

1,458.0

43.3

88.0

162.5

286.1

1.8

Yes

0.5

100

1.5

Altamir

753.5

20.1

56.8

132.8

257.4

2.7

No

(23.2)

100

4.5

ICG Enterprise Trust

733.1

22.5

53.1

109.3

210.8

1.5

Yes

(23.0)

100

2.3

Princess Private Equity

772.8

34.8

47.2

107.6

174.6

1.9

Yes

(11.9)

100

4.8

Standard Life Private Equity

685.7

26.1

47.2

96.5

189.2

1.1

No

(15.3)

100

3.0

NB Private Equity Partners

628.9

31.9

56.0

108.4

242.0

2.1

Yes

(24.8)

116

3.4

Oakley Capital Investments

617.7

18.2

71.6

116.2

157.4

2.5

Yes

(15.1)

100

1.3

BMO Private Equity Trust

303.2

22.7

52.6

98.2

192.2

1.3

Yes

(15.7)

115

4.0

Simple average (excl. HgCapital)

698.6

25.6

55.3

111.8

205.2

2.0

N/A

(18.9)

103

3.2

HGT rank in peer group

1

1

1

1

1

5

N/A

1

7

6

Source: Morningstar, Edison Investment Research. Note: TR = total return. Net gearing is total assets less cash and equivalents as a percentage of net assets (100 = ungeared). *12-month performance based on latest available ex-par NAV: HGT, Princess Private Equity, NB Private Equity Partners, Standard Life Private Equity – end-March 2021; ICG Enterprise Trust – end-January 2021; Altamir, BMO Private Equity Trust, Oakley Capital Investments – end-December 2020.

HGT is currently trading broadly in line with its NAV compared to an average premium of c 6% in Q121. The narrowing premium to NAV since end-March 2021 followed a c 10% increase in NAV as at end-March 2021 compared with NAV at end-February 2021, coupled with a c 6% share price growth between end-March 2021 and 8 June 2021. Its current slight discount/premium to NAV is broadly consistent with HGT’s historical trading (an average discount to NAV of c 3% over a period of three years to 8 June 2021). In the past the stock has only occasionally moved into double-digit discount territory, which is in general typical for PE investment companies. This has usually coincided with major UK stock market corrections, including the March 2020 market crash triggered by the COVID-19 pandemic, following which, however, the discount to NAV closed relatively quickly.

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

Source: Refinitiv, Edison Investment Research

Investments and realisations continue in 2021

After a record investment and realisation volume in 2020 (£403m and £364m in the period, respectively), HGT has invested a further £147m and generated £112m from exits so far in 2021. The latter figure includes a £21.4m realisation on TeamSystem, which should be considered a partial roll-over as the exit from the company by the Hg Genesis 6 Fund was coupled with a £14.3m investment in the company by the Hg Genesis 8 Fund. Since our last review note published on 31 March 2021, HGT announced a £12.6m investment in Dext (a provider of pre-accounting software), a £7.4m investment in AUVESY (a provider of version control software for smart production machinery and other industrial internet of things devices) and a minor £0.6m realisation from EidosMedia (a provider of enterprise content management software).

HGT continues posting significant uplifts on realisations (after 50% on average in 2020), with Mitratech’s uplift at 43%, TraceOne’s at 30% (both announced in March 2021) and A-Plan Group’s at 18% (completed in Q121). Mitratech and TraceOne were disposed to other investment companies (Ontario Teachers’ Pension Plan Board and Symphony Technology Group, respectively), while A-Plan Group was a trade sale to Hyperion (formerly Howden), an international insurance broking group. The latter is also a portfolio holding of HGT, which it invested in after the disposal of A-Plan Group. Over the past 10 years, the manager realised 54 investments, with an average uplift to last carrying value of 27%.

Exhibit 5: HGT’s investments and realisations, 2006–21 to date*

Source: HgCapital Trust, Edison Investment Research. Note: *Last column with transactions and realisations announced to 8 June 2021 and cash as % of NAV at end-March 2021.

HGT’s coverage ratio stood at a healthy 69% on 12 May 2021, compared with 60% at end-FY20 and c 50% on average between FY16 and FY20. Outstanding commitments were £485m and are likely to be invested over the next three to four years at a rate of c £150 pa. HGT’s liquid resources at end-March 2021 (adjusted for all announced transactions and the dividend payable in May) reached £136m, with the company’s £200m revolving credit facility remaining undrawn. HGT’s liquidity position has been supported with a series of tap equity issues recently, with the total volume of c £50m in 2021 to 8 June 2021 (vs £25m in total in 2020).

Exhibit 6: HGT’s historical coverage ratio

Source: HgCapital Trust, Edison Investment Research. Note: Last column at 12 May 2021, including all transactions announced to this date, the proposed final dividend of 3.0p per share and equity raised via tap issuance.

The manager expects further investment and liquidity events over the next 12 months. In a typical 12-month period, it makes between eight and 16 new platform investments and seeks to deliver similar numbers of liquidity events each year, including sales or partial sales of portfolio companies and refinancings (HGT completed or announced seven investments and five realisations in 2021 to date). Hg will maintain its cautious and selective approach and focus on capitalising on situations where it has a specific angle and many years of knowledge of the business and its end-market, as well as strong relationships with founders and management teams. Bolt-ons and strategic M&A within the portfolio remain a key focus.

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.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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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.

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

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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

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.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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.

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

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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