- Trust delivers 5.4% NAV total return
- Double-digit sales growth from all top 20 holdings
- Stifel says shares deserve to trade closer to NAV
Private equity investor HgCapital Trust (HGT) delivered a solid 5.4% net asset value (NAV) total return in the year to 31 December 2022, ahead of the 0.3% increase for the FTSE All Share Index.
However, the trust’s share price total return was down 15.1% due to the wider de-rating of listed private equity funds as rising inflation and interest rates hit the valuations of technology and unquoted companies.
Yet despite the tough economic backdrop, all of HgCapital Trust’s top 20 holdings delivered double-digit sales growth last year, with an impressive 85% churning out double-digit earnings growth.
CREDITABLE RESILIENCE
For the uninitiated, HgCapital Trust is a FTSE 250-listed private equity investment trust which invests in unquoted software and services businesses with strong growth prospects and resilient business models.
Strong portfolio trading continued to be the main driver of performance last year, contributing to a 5.4% NAV total return increase to 456.6p per share.
Chairman Jim Strang pointed out that the trust’s portfolio is made up of 48 individual companies spread across eight end-market “clusters” well-known to the trust’s manager, Hg, and operating ‘across the B2B software and technology-enabled business services sectors’.
‘As part of the long-standing investment strategy adopted by Hg, these companies typically benefit from sector leading market positions and have highly resilient and defensive business models with loyal customers and high rates of recurring revenues,’ explained Strang.
He insisted the portfolio has ‘continued to deliver strong operating performance in the last year, despite the many and obvious challenges presented in the broader global economy.’
PERFORMANCE DRIVERS
During the year, particularly strong growth came from the likes of Litera, Howden, Access, FE fundinfo, insightsoftware and IFS Workwave.
But the most significant value driver was the recapitalisation of enterprise resource planning and payroll company Access, which led to a £120 million valuation uplift.
In a record year for both investment and realisations for the trust, there were six new investments with the largest including Scandinavia-based enterprise resource planning and payroll business IFS Workwave.
ANALYST VIEWS
One of Numis’ favourite investment trusts based on the strength of its track record, the broker believes ‘exposure to “dull” technology companies providing mission-critical software, generating high levels of recurring revenues is an attractive place to have exposure to in difficult macro conditions.’
Marked down 2.5% to 328p amid today’s wider market sell-off, HgCapital Trust’s shares are trading at a rough 25% discount to NAV.
Numis believes this offers investors ‘attractive value for a portfolio of companies that continue to deliver rapid growth and should be relatively resilient in difficult market conditions. We believe that the NAV can continue to be resilient and that investors are too aggressively discounting the potential impact of the macro backdrop on listed private equity share prices.’
The broker also stressed that while there may be ‘some general market volatility today around the banking issues in the US’, it understands Hg portfolio companies have ‘no borrowing relationships with SVB, although we believe there are some small deposits these have been guaranteed by the Fed overnight, and therefore we expect no impact.’
Stifel thinks HgCapital Trust’s falling share price has reflected ‘expectations of a cliff-edge fall in the NAV’, but says the full year figures should give investors ‘some comfort that these profitable companies continue to perform strongly and we are buyers of the shares with a fair valuation of 425p.’
It argues the shares ‘deserve to trade closer to NAV given the good long-term track record, strong balance sheet with 9% net cash (before £350 million bank facility) and ability to opt-out of future commitments if necessary.’
