2023 was a banner year for private equity investor HgCapital Trust (HGT), continuing its strong run of outperforming the FTSE All-Share.

Despite market volatility, the company posted a 26.2% share price total return last year, lifting its 10-year total return to an average of 18.8% per year.

STRONG UNDERLYING PROFIT GROWTH

HgCapital invests in unquoted software and services businesses managed by its parent Hg, which aims to create value through strategic and operational change at its investee companies.

Demonstrating the high-growth nature of its holdings as well as the changes brought about by Hg, sales and EBITDA (earnings before interest, tax, depreciation and amortization) across the top 20 investments, which represent 76% of the portfolio by value, grew by 25% and 30% respectively last year.

The firm said it took a cautious approach to investments in the first half of 2023, but ‘a stabilization in market conditions’ lead it to step up its activity during the second half.

‘The resilience of the Hg portfolio has been demonstrated with valuations and profitability remaining stable’, said head of research David Toms.

‘Our companies are 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’, added Toms.

ACTIVE MANAGEMENT PAYING OFF

Strong portfolio trading continued to be the main driver of performance, contributing to a total return NAV (net asset value) increase of 11.1%, closing the year at 500.5p per share and net assets of £2.3 billion.

At the same time the share price outperformance meant the discount to NAV narrowed from 23% to 13% at the end of the year.

Demonstrating its ability to actively manage its portfolio in order to add value, the trust invested £74 million in new and existing opportunities with a further £148 million of deals signed and due to complete this year.

Meanwhile, there were £324 million of asset sales with an average uplift of 25% to the 2022 year-end carrying value and there are a further £191 million of sales signed and pending completion this year.

In terms of outlook, the firm said the improving investment environment ‘supports a likely increase in deployments in 2024’.

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