Private equity investor HgCapital Trust (HGT) delivered a benchmark-beating first half performance as its tried-and-tested strategy of investing in unquoted software and services businesses with strong growth prospects and resilient business models helped maintain strong net asset growth momentum.
Emerging from the pandemic, the board believes the trust’s prospects ‘remain attractive’, with its strong portfolio of assets enjoying ‘good positive momentum and an active new deal pipeline’.
HgCapital Trust produced a net asset value total return of 21.4% for the half to June 2021, smashing the FTSE All-Share Index’s 11.1% total return with net assets reaching a record £1.6 billion.
This stellar performance reflected strong double digit growth from a portfolio benefiting from the digitalisation of business processes accelerated by the pandemic, with companies including Visma, Access and MeinAuto among the top contributors.
LONG-TERM RETURNS
Managed by private equity outfit Hg, the trust puts money to work with unquoted software and service businesses across Europe and seeks to provide shareholders with consistent long-term returns excess of the FTSE All-Share.
Indeed, a£1,000 investment in HgCapital Trust made 20 years ago would now be worth £15,794, a total return of 1,479%, while an equivalent investment in the All-Share would be worth just £2,952.
HgCapital Trust is focused on software and tech-enabled services firms that seek to automate dull tasks. Its sweet spot is business critical software which generates high levels of recurring revenue, which has led to a focus on eight industry clusters including Tax & Accounting, ERP & Payroll, Legal & Regulatory Compliance, Healthcare and Wealth Management.
IMPORTANT STRATEGIC POSITIONS
‘Despite the uniquely challenging circumstances we have all faced during the Covid-19 pandemic over the last 18 months, I am pleased to report to you that HGT and its underlying investments continued to perform very well in the first half of 2021,’ said chairman Jim Strang.
Luke Finch, Partner and Head of Client Services at Hg, commented: ‘Continued M&A activity across the Hg portfolio has been a major theme of the last six months, and this should remain the case for the foreseeable future.
‘Our portfolio companies are often acting as consolidators pursuing a roll-up strategy, sometimes they are “consolidates” in larger strategic combinations; but either way, the pronounced activity level highlights the important strategic positions all our portfolio companies hold in their respective market segments and clusters.’
THE NUMIS VIEW
Shares in HgCapital Trust cheapened 3.5p to 398.5p after a strong run, yet Numis Securities believes the outlook for the trust remains strong ‘given the theme of digitalisation of business processes is accelerating, partly due to the impact of Covid-19.’
The broker believes HgCapital trust is ‘positioned to benefit from these trends with a portfolio of software and tech-enabled services companies. We expect the portfolio to continue its strong revenue and earnings growth based on the high degree of recurring revenues.’
As a result, Numis views HgCapital Trust as ‘well-placed to continue to build on its exceptional track-record, which has seen it deliver NAV total returns of 14.3% per annum over the last 20 years.’
While portfolio valuation multiples are relatively high, a risk for investors to weigh, Numis point out ‘expensive relative value has not impacted returns in recent years’.
It believes the risks are ‘partly mitigated by Hg being a specialist in its target clusters with the capability to identify attractive opportunities where it can add value, as well as M&A allowing platform investments to build scale through low multiple acquisitions.’
