Last close As at 05/08/2026
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Market capitalisation
GBP1,776m
Research: Investment Companies
HgCapital Trust (HGT) delivered a 4.6% NAV TR in H123, with its performance continuing to be mostly driven by robust trading across its portfolio (with the associated increase in portfolio value in H123 of £203.8m, or 8.3% of end-2022 portfolio value) and a minor positive impact from multiples (£34.1m or 1.4%). Hg was cautious in terms of new platform investments in H123, but saw record high M&A activity across its portfolio, highlighting increasingly attractive pricing and a strong flow of opportunities for smaller bolt-on investments. HGT’s 60% coverage of outstanding investment commitments by its liquid resources makes the trust well positioned for a potential uptick in PE deal activity.
HgCapital Trust |
Seizing ‘buy-and-build’ opportunities |
Investment trusts |
22 September 2023 |
Analysts
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HgCapital Trust (HGT) delivered a 4.6% NAV TR in H123, with its performance continuing to be mostly driven by robust trading across its portfolio (with the associated increase in portfolio value in H123 of £203.8m, or 8.3% of end-2022 portfolio value) and a minor positive impact from multiples (£34.1m or 1.4%). Hg was cautious in terms of new platform investments in H123, but saw record high M&A activity across its portfolio, highlighting increasingly attractive pricing and a strong flow of opportunities for smaller bolt-on investments. HGT’s 60% coverage of outstanding investment commitments by its liquid resources makes the trust well positioned for a potential uptick in PE deal activity.
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HGT’s portfolio changes in H123 (£m) |
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Source: HgCapital Trust |
Secular digitalisation trend continues
HGT’s portfolio has benefited from the structural trend towards digitalisation of business processes for many years now, with accelerated adoption following the COVID-19 pandemic. According to Hg’s (HGT’s investment manager’s) head of research, software spending continues to grow significantly, even in advanced economies (where IT spending in relation to GDP is already high versus less developed countries), suggesting that the sector will not reach saturation any time soon. This seems to be confirmed by Gartner’s forecast, released in July 2023, of global software spending growth of 13.7% in 2023 and 14.1% in 2024, as enterprises prioritise spending to capture a competitive edge through increased productivity, automation and other software-driven transformation initiatives.
Consistently delivering top-line and EBITDA growth
Despite the tougher external environment, SaaS companies should continue generating healthy top-line growth of c 15% pa and increasing profitability over the next two years, based on current Refinitiv consensus. HGT is a quality play in the sector, underpinned by the defensive growth profile of its holdings and Hg’s sector expertise, in-house value creation team and buy-and-build strategy. HGT’s historical revenue and EBITDA growth across its top 20 holdings was 20–30% pa at a margin above 25% (H123: 30%). This includes c 10–15% pa organic revenue growth of HGT’s portfolio companies, which is less dependent on new client additions compared to some higher-growth tech businesses, according to Hg.
NAV TR of 8.4% over the last 12 months
HGT’s H123 NAV TR of 4.6% (of which 0.6% was in Q223) brought its 12-month return to end-June 2023 to 8.4%, slightly ahead of the UK All-Share Index at 7.9% and broadly in line with the MSCI World Small Cap Index at 8.4% (we consider listed small caps as a better public comparator for private equity than broader all-cap indices), see Exhibit 1. HGT’s one-year NAV TR was also the second-best result within its PE peer group after Princess Private Equity (see Exhibit 2).
HGT’s long-term performance remains well above public indices. Moreover, HGT visibly outperformed its peer group average of 18.5% pa over the last three years, with an annualised NAV TR of 22.7%. Its performance over five years was only behind Oakley Capital Investments (which has a much more concentrated portfolio), and over 10 years it was the top performer (with the second-ranked HarbourVest Global Private Equity having a meaningful share of venture capital/growth investments).
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Exhibit 1: HGT’s share price and NAV TR versus public indices to end-June 2023 in sterling terms (%) |
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Source: Refinitiv, Edison Investment Research. Note: Three-, five- and 10-year performance figures annualised |
Exhibit 2: HGT versus listed private equity peers at 22 September 2023*
% unless stated |
Market cap £m |
NAV TR |
NAV TR |
NAV TR |
NAV TR |
Ongoing |
Perf. |
Discount |
Net |
Dividend |
HgCapital Trust |
1,852 |
8.4 |
84.7 |
151.0 |
410.5 |
1.7 |
Yes |
(14.5) |
104.3 |
1.7 |
HarbourVest Global Priv Equity |
1,878 |
(2.5) |
86.4 |
134.6 |
366.4 |
1.2 |
Yes |
(40.7) |
100.0 |
0.0 |
Pantheon International |
1,561 |
(1.7) |
58.8 |
86.5 |
241.5 |
1.3 |
Yes |
(34.6) |
100.0 |
0.0 |
ICG Enterprise Trust |
814 |
8.2 |
79.4 |
111.6 |
258.6 |
1.5 |
Yes |
(35.8) |
106.1 |
2.6 |
abrdn Private Equity Opportunities |
674 |
4.9 |
87.1 |
116.6 |
291.9 |
1.1 |
No |
(40.8) |
104.6 |
3.5 |
CT Private Equity Trust |
356 |
7.5 |
96.2 |
128.4 |
275.2 |
1.2 |
Yes |
(28.2) |
111.9 |
5.5 |
Apax Global Alpha |
822 |
(2.3) |
33.7 |
70.5 |
N/A |
1.3 |
Yes |
(26.3) |
100.0 |
6.9 |
NB Private Equity Partners |
790 |
(2.8) |
66.1 |
91.5 |
285.5 |
1.9 |
Yes |
(27.3) |
108.4 |
4.8 |
Princess Private Equity |
636 |
9.7 |
32.3 |
58.8 |
191.3 |
1.7 |
Yes |
(28.8) |
105.7 |
3.4 |
Altamir |
814 |
1.4 |
32.4 |
86.8 |
247.9 |
2.7 |
No |
(26.9) |
100.0 |
4.2 |
Oakley Capital Investments |
805 |
6.0 |
91.0 |
170.0 |
272.2 |
2.7 |
Yes |
(31.1) |
100.0 |
1.0 |
Simple average (excl. HgCapital) |
915 |
2.8 |
66.3 |
105.5 |
270.1 |
1.6 |
- |
(32.0) |
103.7 |
3.2 |
HGT rank in peer group |
2 |
2 |
5 |
2 |
1 |
4 |
- |
1 |
6 |
8 |
Source: Refinitiv, Edison Investment Research. Note: Net gearing is total assets less cash and equivalents as a percentage of net assets (100 = ungeared). *12-month performance based on ex-par NAV as at end-June 2023, except for ICG Enterprise Trust (end-April 2023). **Based on last published annual report, excludes look-through expenses at the underlying funds level.
EBITDA growth and margin at 30%
Revenue and EBITDA growth across its top 20 holdings (76% of end-June 2023 NAV) over the 12 months to end-June 2023 reached 29% and 30%, respectively (see Exhibit 3). Top-line growth was predominantly supported by sales to existing clients (with high renewal rates, as well as cross- and up-sell activity). This is in line with Hg’s earlier expectations of some pressure on sales to new customers as they become more reluctant to commit to new software and services in the current challenging macroeconomic environment. That said, we consider this merely a postponement (rather than an abandoning) of investments in business digitalisation. Average last 12-month (LTM) EBITDA margin to end-June 2023 across HGT’s top 20 holdings remained resilient at 30% (vs 31% LTM to end-June 2022).
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Exhibit 3: HGT’s portfolio change waterfall (£m) |
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Source: HgCapital Trust |
Given the normalisation of the interest rate environment, it is instructive to look at the interest coverage and debt maturity profile of PE portfolios like HGT’s. Average net debt to LTM EBITDA across HGT’s top 20 holdings was 7.4x at end-June 2023 (down from 8.0x at end-2022), which together with the above-mentioned average EV/EBITDA multiple implies a substantial c 72% equity cushion. The average new-issue loan spreads for a single B issuer in Europe stood at EURIBOR +454bp in Q223 (according to Partners Group’s recent quarterly liquid loan market commentary). For illustrative purposes, if we apply this spread to the current three-month EURIBOR (3.955%), a net debt to EBITDA of 7.4x translates into an EBITDA interest coverage ratio of 1.6x, which leaves some headroom in terms of interest cover, especially for less capital-intensive businesses such as software and services providers.
HGT considers this leverage level as appropriate given the high share of recurring revenues and strong cash generation of its businesses. We also note that c 75% of the debt across the portfolio managed by Hg is hedged for an average two years. Moreover, there are no meaningful maturities across the portfolio until 2025 (with most of the debt maturing in 2027–29). Hg highlights that the debt structure of its portfolio companies consists of both straight senior debt and junior/payment-in-kind debt to preserve cash for bolt-on acquisitions.
We also note that Hg utilises credit lines to fund portfolio M&A and return cash to investors. These facilities are unsecured and have no recourse to HGT and the underlying Hg private funds HGT invests in. At end-June 2023, the fund level facilities attributable to HGT’s investments stood at £362.0m, which represents c 15% of HGT’s portfolio value (including accrued income but before carried interest and the balance of these facilities) or c 10% of the combined portfolio value and HGT’s outstanding commitments.
Balance sheet allows for seizing new opportunities
Few platform investments in H123, pick-up expected in H223
HGT remained cautious in terms of new investments, with £32.7m deployed in H123 (of which c £17m was in Q223) versus £71m in H122. This includes a c £15.5m new investment in GTreasury (a US-based treasury, payments and risk management software provider) announced in May 2023, as well as several follow-on investments in Howden, Citation, GGW, Rhapsody and Blinqx to support their M&A activity. HGT’s current focus in terms of capital deployment is on bolt-on M&A across its portfolio rather than on new platform investments, with around 300 bolt-on acquisitions across HGT’s portfolio in the 12 months to end-March 2023. A combination of macro headwinds and greater seller motivation allowed for considerable multiples arbitrage on the add-on investments, with acquisition multiples being on average c 40% below the EV/EBITDA multiples at which HGT values the acquirers (its platform investments). Hg notes that Europe is particularly interesting in terms of ‘buy-and-build’ opportunities given differences in market conditions across countries. That said, Hg also highlighted that it sees some indications that conditions for PE deals are more supportive in H223, especially in sectors HGT is invested in. Post balance sheet date, HGT made a £6m new investment in Nomadia, a European SaaS provider of smart mobility solutions that help companies plan and optimise the travel and activity of their mobile workers in real time.
Valuation uplifts on exits consistent with recent years
Meanwhile, £229m was returned to HGT in H123, largely from the full realisation of Transporeon (c £109m, announced in December 2022 and closed in April 2023) and secondary fund transactions (though the latter represent a deferred consideration, see our March update note for details). HGT continued to realise its investments above prior year-end fair value, as illustrated by the transactions agreed post balance sheet date (representing estimated gross proceeds of c £55m): the full realisation of Commify (completed at a 32% uplift), as well as partial exits from Azets (16% uplift) and TeamSystem (68% uplift). Although these are relatively small holdings for HGT (2.3%, 1.2% and 0.7% of end-June 2023 portfolio value, respectively), we consider the average uplift of 39% on these transactions as a positive indicator for HGT’s portfolio valuations. Moreover, it is consistent with HGT’s performance in recent years, as the average uplift on all HGT’s realisations since 2017 was also 39% (average uplift over 10 years was 24%).
Commitment coverage ratio above historical average
HGT’s balance sheet capacity was assisted by recent realisations of individual holdings, as well as other measures introduced earlier this year, including the upsizing of HGT’s credit facility to £350m, the secondary sale of Genesis 8 limited partner (LP) interest and the reduction in Hg Saturn 3 commitment. As a result, Hg estimates that HGT’s total available resources (including the undrawn credit facility) will, after completion of all announced transactions and the interim dividend payment in October 2023 (proposed at 2.0p per share), amount to £657m. This represents a c 60% coverage ratio of HGT’s £1.1bn of total outstanding commitments, slightly above its 2018–22 average (see Exhibit 4). We note that HGT recently made an additional €50m commitment into Hg Mercury 4 (Hg’s 2023 vintage of its private fund focused on small-cap PE deals), bringing its total commitment to the fund to €175m.
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Exhibit 4: HGT’s historical commitment coverage ratio |
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Source: HgCapital Trust, Edison Investment Research; Note: *Pro forma as at end-August 2023, after completion of all announced transactions and the interim dividend payment in October 2023. |
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Research: TMT
Filtronic has won a £3.4m contract to supply its solid state power amplifiers (SSPAs) to a leading low Earth orbit (LEO) satellite communications equipment provider. Filtronic supported the customer’s trial of E-band connectivity earlier this year; this contract is for the second phase of the customer’s roll-out and is the first time that E-band frequencies have been used in volume in a commercial LEO space application. Hot on the heels of winning a satellite payload development contract from the European Space Agency, this highlights the company’s growing presence in the space sector.