Annual Financial Report

HgCapital Trust PLC

11 March 2024

 

HgCapital Trust plc

ANNUAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2023

 RESILIENT NAV PERFORMANCE DRIVEN BY STRONG TRADING IN THE UNDERLYING PORTFOLIO AND CONTINUED REALISATION ACTIVITY IN A CHALLENGING MACRO ENVIRONMENT

London, 11 March 2024:  HgCapital Trust plc ('HgT'), today announces its annual results for the year ended 31 December 2023. 

HgT provides investors with a listed vehicle to invest in unquoted businesses managed by Hg, Europe's largest investor in software & services companies.

The objective of HgT is to provide shareholders with consistent long‑term returns in excess of the FTSE All‑Share Index by investing predominantly in unquoted businesses where value can be created through strategic and operational change.

This objective has been demonstrated with a 10-year share price total return of +18.8% p.a.

Highlights over 2023 include:

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

¡ Share price total return of +26.2% over the year, closing at 434.5p per share and a market capitalisation of £2.0 billion.

¡ Discount narrowed from 23% to 13%.

¡ Continued investment, with £74 million of new and further investments by HgT across the core investment clusters targeted by Hg; with a further estimated £148 million of transactions signed pending closing in 2024.

¡ £324 million of realisations, with full and partial realisations at an average uplift of 25% to the carrying value at 31 December 2022; an estimated further £191m of realisations signed and due to complete in 2024.

For the third year in a row, HgT tops a list of investment companies that would have made investors more than £1 million, according to research from The Association of Investment Companies (AIC).

Investing the full ISA allowance annually from 1999 to 2023, a total of £306,560, and reinvesting the dividends in HgT shares would have generated a tax-free amount of over £2.2m by 31 January 2024.

Jim Strang, Chairman of HgT, commented:

"HgT delivered a resilient performance in 2023, successfully navigating challenging market

conditions. The portfolio maintained strong underlying performance over the year with sales and EBITDA across the top 20 investments (76% of the portfolio) growing at 25% and 30% respectively. Investment activity was notably lower in the first half of 2023 than seen in previous years, as the Manager took a cautious stance on investment activity. However, a stabilisation in market conditions supported an increase in activity for the kind of highly sought-after companies that constitute the portfolio, throughout the second half of the year."

David Toms, Head of Research at Hg, commented:

"During a period of increased volatility, the resilience of the Hg portfolio has been demonstrated with valuations and profitability remaining stable. HgT's 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."

SUMMARY performance

	29 February 2024	% Total return	31 December 2023	31 December 2022	% Total return
NAV per share	500.4p	-0.0%	500.5p	456.6p	+11.1%
Share price	440.0p	+1.3%	434.5p	350.5p	+26.2%
FTSE All-Share Index		-1.1%			+7.9%
		YTD 2024 Movement			2023 Movement
Net Asset Value	£2.3bn	+£0m	£2.3bn	£2.1bn	+£201m

Source: Hg, Factset. All references to total return allow for all historic dividends being reinvested
Note: Hg undertakes full revaluations of the portfolio on a quarterly basis, the next process being 31 March 2024, therefore the movement in unrealised value of the portfolio to the end of February 2024 is attributable to FX only.

Performance overview

Net assets of £2.3 billion, with continued long-term outperformance of the FTSE All-Share over one, three, five, ten and twenty-year periods:

-     NAV per share of 500.5p, a total annual return of +11.1% to 31 December 2023.

-     Share price total return of +26.2% over the year.

-     Proposed final dividend of 4.5p per share (full year dividend of 6.5p per share).

Strong double-digit growth from the top 20 portfolio:

-     Revenue and EBITDA growth of 25% and 30% respectively across the top 20 investments (76% of the portfolio) over the last twelve months, EBITDA margins of 31%.

-     Valuation multiple (EV/EBITDA) of 26.1x and net debt to EBITDA ratio of 7.4x for the top 20 investments (76% of the portfolio).

Continued portfolio activity and commitments to drive future value:

-     £324 million of realisations, including full and partial exits, refinancings and secondary Hg fund transactions.

-     Continued investment with £74 million invested on behalf of HgT into companies that Hg (the Manager) has known for many years and have demonstrated a track record of strong performance across market cycles.

-     Further commitments of c. £183 million to Hg Funds, with total outstanding commitments at 31 December 2023 of £1.2 billion. These will be deployed over the next three to four years.

POST PERIOD TO 29 FEBRUARY 2024

§ Pro forma NAV per share of 500.4p.

§ Pro forma Net assets of £2.3 billion.

§ Share price of 440.p, performance of +1.3% since 31 December 2023.

Realisations and investments

§ The sale of Argus that completed in February 2024 represented the fourth material realisation event announced by Hg over the prior four weeks, including partial realisations in IRIS, Visma and GGW resulting in c. $3.5 billion of proceeds that will be returned to Hg clients, including c. £191 million to HgT, once these transactions close in 2024.

§ Estimated £148 million invested by HgT, primarily into four new and existing investments.

Liquid resources and commitments

§ Further £25m increase to the revolving credit facility agreed in March 2024 bringing the total facility to £375m, with the term extended to three years, until March 2027.

§ Available liquid resources (including the credit facility increase) post-completion of all announced transactions and the full year dividend payable in May 2024, are £700 million (31% of 29 February pro-forma NAV).

§ Outstanding commitments of £957 million (42% of 29 February pro-forma NAV). We expect these to be drawn down over the next three to four years.

Outlook

Commentary from Hg (the Manager):

The combination of the long-term nature of listed private equity investment with the types of business that Hg invests in, and robust double-digit growth in trading is expected to continue to drive long-term performance

§ Against a challenging macro environment, Hg's portfolio has demonstrated resilient performance.

§ This has been underpinned by the underlying portfolio companies which remain focused on selling business-critical and non-discretionary software and services to their customers with predictable levels of recurring revenue.

§ An improving investment environment supports a likely increase in deployment in 2024.

§ Further liquidity events are anticipated over the next twelve months.

- Ends -

HgT's 2023 Annual Report, results presentation and an animated presentation from Hg to accompany the results are available to view at:  http://www.hgcapitaltrust.com/.

For further details:

	HgCapital Trust plc
	Laura Dixon (Senior Investor Relations Manager, Hg)		[phone]
Brunswick
Azadeh Varzi		[phone]

About HgCapital Trust plc

HgCapital Trust plc is an investment company whose shares are listed on the London Stock Exchange (HGT.L). HGT gives investors exposure, through a liquid vehicle, to a portfolio of high-growth unquoted companies, managed by Hg, an experienced and well-resourced private equity firm with a long-term track record of delivering superior risk-adjusted returns for its investors.

For further details, see www.hgcapitaltrust.com and www.hgcapital.com

Past performance is not a reliable indicator of future results. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations and investors may not get back the amount they originally invested.

HgCapital Trust plc

Annual Report and Accounts and Notice of Annual General Meeting

HgCapital Trust plc (the "Company" or "HgT") announces its annual results for the year ended 31 December 2023 and the publication of its annual report and accounts for the same period, which includes the notice of Annual General Meeting.

The objective of HgCapital Trust ('HgT') is to provide shareholders with consistent long-term returns in excess of the FTSE All-Share Index by investing predominantly in unquoted companies where value can be created through strategic and operational change.

FINANCIAL AND PERFORMANCE HIGHLIGHTS

2023 performance at a glance

+11.1%

NAV per share (500.5p)

31 December 2022: +5.4%

£2.3bn

Net assets

31 December 2022: £2.1bn

+26.2%

Share price (434.5p)

31 December 2022: -15.1%

£2.0bn

Market capitalisation

31 December 2022: £1.6bn

6.5p

Full year dividend

31 December 2022: 7.0p

1.7%

Total ongoing charges

31 December 2022: 1.7%

£74m

Cash invested on behalf of HgT

31 December 2022: £527m

£324m¹

Realisations to HgT

31 December 2022: £404m

£625m

Available liquid resources

(27% of NAV)

31 December 2022: £476m (23% of NAV)

£1.2bn

Outstanding commitments
(53% of NAV)

31 December 2022: £1.2bn (57% of NAV)

¹Includes £91 million in relation to deferred proceeds.

Note NAV per share and share price return on a total return basis assuming all historical dividends have been re-invested, which is an Alternative Performance Measure ('APM'). Please see the definitions of the APM's in the glossary pages 117 to 118 of the full Annual Report and Accounts for the year ended 31 December 2023.

Top 20 investments (76% of portfolio value)

A snapshot as at 31 December 2023

+25%

LTM sales growth

31 December 2022: +30%

+30%

LTM EBITDA growth

31 December 2022: +25%

26.1x

EV to EBITDA multiple

31 December 2022: 27.2x

7.4x

Net debt to EBITDA ratio

31 December 2022: 8.0x

£10.6bn

LTM revenues

31 December 2022: £9.5bn

£3.3bn

LTM EBITDA

31 December 2022: £2.8bn

31%

EBITDA margin

31 December 2022: 29%

CHAIRMAN'S STATEMENT

HgT delivered a resilient performance in 2023, successfully navigating challenging market conditions. The portfolio maintained strong underlying performance over the year with sales and EBITDA across the top 20 investments (76% of the portfolio) growing at 25% and 30% respectively. Investment activity was notably lower in the first half of 2023 than seen in previous years, as the Manager took a cautious stance on investment activity. However, a stabilisation in market conditions throughout the second half of the year, supported an increase in activity for the kind of highly sought-after companies that constitute the portfolio.

Jim Strang, Chairman, HgT

2023 was very much a year of two halves with the challenging market conditions of 2022 remaining in evidence throughout the first half of the year. Conditions improved during the second half, as markets stabilised and financing conditions became more supportive for transactions, especially for the kinds of high-quality assets with attractive market positions and growth profiles that constitute the HgT portfolio. The portfolio, which numbered 49 businesses at the year end, traded well throughout the year, reflecting the characteristics of the types of companies targeted for investment by Hg. Hg continues to refine and enhance both its investment capability, notably around the important topic of Artificial Intelligence, and in the strength of the team globally. On the latter point, Hg recently welcomed Alan Cline, formerly a senior partner at leading software investor, Vista Equity Partners, and based in the USA, onto its Executive Committee. Given the discipline and rigour of the investment approach and the health of both the portfolio and the HgT balance sheet, the Board is cautiously optimistic for the year ahead.

I would like to draw your attention to two new initiatives the Board has taken over the year, aimed at increasing the transparency and effectiveness of brand marketing and communication for shareholders. Firstly, in the case of increasing transparency, shareholders may have noticed the release of our first preliminary trading update on 5 February 2024, which aimed to provide shareholders with earlier guidance on the performance of HgT.  Preliminary trading updates will now be provided in respect of the interim and full year results, after approval by the HgT Audit Valuation and Risk Committee ('AVRC') and the Board.

Secondly, HgT has refreshed and updated its website and reporting materials as part of a broader integrated brand marketing plan to further support open communication with our stakeholders. This plan has also seen HgT engage with third party marketing specialists to increase the scope and span of brand marketing activities for HgT in the UK and overseas, where regulations permit.

Highlights in 2023 included:

•  26.2% total share price return

•  11.1% NAV per share growth on a total return basis, with net assets of £2.3 billion

•  Discount narrowed from 23% to 13%

•  £74 million of new and further investments by HgT across the core investment clusters targeted by Hg; with a further £200 million of deals signed pending closing in 2024

•  £324 million¹ in realisations to HgT, from realisation activity with full and partial realisations at an average uplift to carrying value of 25%

•  £183 million of further commitments to Hg funds

•  £625 million of liquid resources available, including an undrawn banking facility of £350 million

•  £1.2 billion of outstanding commitments across the Hg fund platform to be invested over the next three to four years

¹Includes £91 million in relation to deferred proceeds

Performance

The NAV of HgT increased by 11.1% over the year, reflecting the ongoing strength of the operating performance of the HgT portfolio. HgT's share price saw a total return of 26.2% over 2023 and has seen a CAGR on a total return basis of 17.4% p.a. over the past 20 years, outperforming the FTSE All Share index by 10.4% p.a. over the same period.

The total net assets of HgT at 31 December 2023 were £2.3 billion, an increase of c.£200 million over the reported figures at 31 December 2022. An analysis of NAV movements and the underlying portfolio is set out on page 37 of the full Annual Report and Accounts for the year ended 31 December 2023.

At the end of December 2023, the HgT portfolio consisted of 49 investments, all of which conform to the Hg sector focus and investment strategy, targeting software and services businesses. These assets have continued to perform well in aggregate. The underlying performance of the portfolio developed very much in line with progress seen in recent years. The top 20 underlying companies (76% of the portfolio) continued to deliver strong revenue growth over the last 12 months of 25% (December 2022: 30%) and EBITDA growth of 30% (December 2022: 25%), reflecting the defensive-growth nature of the businesses in which HgT is invested. The portfolio not only continues to generate strong top-line growth and solid profitability, with the top 20 companies reporting an average EBITDA margin of 31%. Currently, 98% of the portfolio by value is held above its original cost of acquisition, a testament to the asset selection and value creation skills of the Manager.

These businesses typically exhibit highly predictable forward cash flows and are appropriately financed with significant covenant flexibility. The top 20 investments have seen a weighted average net debt to EBITDA ratio of 7.4x (December 2022: 8.0x), which is consistent with the highly recurring revenues of the businesses that make up the Hg portfolio and is typical for large, high quality software assets in general. Given the average valuation multiple for the portfolio is 26.1x EV-to-EBITDA, this implies that c.30% of the portfolio is funded by leverage, which allows a significant equity cushion within the portfolio and gives the Manager confidence that this is a prudent level of leverage for the assets within the portfolio and consistent with similar peer companies in the market. Hg has a dedicated capital markets team which continually monitors and manages the capital structures of the underlying portfolio companies to ensure they are as robust and flexible as possible in terms of tenor, interest cost and time to maturity.

HgT aims to achieve long-term growth in the net asset value per share and in the share price, rather than to deliver a specific dividend yield. As regards to the 2023 financial year, HgT will pay a final dividend of 4.5 pence per share (2022: 4.5 pence per share), payable in May 2024, bringing the full year dividend to 6.5 pence. The Board will provide further guidance on the dividend to shareholders, when appropriate.

Dividend: see page 114 of the full Annual Report and Accounts for the year ended 31 December 2023.

Dividend re‑investment plan: page 114 of the full Annual Report and Accounts for the year ended 31 December 2023.

Transaction activity over 2023 saw HgT generate material cash proceeds from realisations at prices well in excess of the carrying value of investments. The significant sale proceeds have been reinvested into businesses which continue to align with the well proven Hg investment model. With a performing portfolio, an attractive deal pipeline and a well capitalised balance sheet, HgT is well positioned for 2024.

Jim Strang, Chairman, HgT

Investments and realisations

In order to grow the NAV of the portfolio, and to deliver returns for shareholders, HgT operates in a continual cycle of commitments, investments and realisations.

During 2023, HgT made further commitments to Hg funds of £183 million, bringing total commitments to £1.2 billion which will be deployed over the next three to four years into companies and sub-sectors that the Manager knows well and has invested in for many years. The Board also expects further co-investment activity (free of management fees and carried interest), in what is anticipated to be an attractive environment for new investments. This use of HgT's available liquid resources now will support future realisation activity and net asset growth which, in turn, will help to maximise shareholder returns.

Deployment activity was relatively light in 2023, with a total of £74 million of new and further investments completed within the year, including GTreasury, team.blue, P&I, JTL and Nomadia. Follow-on investments to finance bolt-on M&A is an area which the Manager has highlighted as particularly attractive in the current environment and where the sector-leading businesses across the portfolio can further improve their market positions and product and service offering. Further investments were announced both in late 2023 and post the year-end and are due to close in 2024, including Visma, GGW and CINC. On completion, these transactions will represent over £200 million of further investment.

As I have noted in previous reports, the Hg investment model is based around supporting portfolio companies to achieve their full potential and in creating larger, more valuable and attractive businesses as a result, which are much sought after in the markets they operate. Consequently, despite the challenging market conditions, Hg was able to deliver a number of liquidity events over the course of the year, which included the full exits of Transporeon and Commify. In total realisations returned £324 million to HgT with full and partial realisations generating an average uplift of 25% to carrying value. Valuations are an area of continued focus for the Audit Valuation and Risk Committee.

Realisation activity sets Hg apart in a year when many other private equity firms struggled to generate liquidity from their portfolios. Hg believes its exit activity in 2023 was a clear differentiator, highlighting the fundamental strengths and attractiveness of the underlying portfolio to both trade and financial buyers.

Please refer to pages 42 to 45 of the full Annual Report and Accounts for the year ended 31 December 2023 for further information on portfolio transaction activity.

Fundraising

Hg's success in building and creating value in the portfolio supported a new round of fundraising which Hg successfully completed in the year. Participating in this latest fundraising process will support HgT's long-term NAV growth ambitions. Hg successfully raised significant capital in 2023 and as further funds are raised, HgT continues to participate as Hg's largest single investor.

HgT's commitments to the new Hg funds ensure that HgT maintains access to Hg's deal flow, including co-investment opportunities, in what is anticipated to be an attractive investment environment.

For further information on Hg funds, please refer to page 30 of the full Annual Report and Accounts for the year ended 31 December 2023.

Capital Allocation

As part of the Board of HgT's commitment to shareholders, our primary objective is to maximise investment returns through a disciplined approach to the allocation of available liquid resources. This incorporates the continual monitoring by the Board, working with the Manager, of forecast cash flows and estimated returns. As I have stated in past reports, the Board continually seeks ways to improve the effectiveness of governance. As part of this process, in the last year, much attention has been devoted, and shareholder feedback garnered, on the topic of capital allocation and I would like to share the approach, framework and tools adopted as set out below.

Investments

At the core of the capital allocation policy is the imperative to continue to drive compelling investment returns for shareholders. As you will be aware, HgT has delivered very strong shareholder returns to investors over a period of more than two decades, a fact recently highlighted by the AIC. The Board seeks to maintain this long-term record  by continuing to access the repeatable returns delivered by the Hg investment platform. The single biggest driver of long-term returns is HgT's exposure to deals completed by Hg and, as such, the first priority of the Board is to ensure that HgT is positioned to access these returns to the fullest extent possible, at acceptable levels of risk.

Buybacks

From time-to-time, market conditions do create dislocations between the share price of HgT and its stated net asset value. The Board, the Manager and HgT's broker monitor such dislocations closely, following a clearly defined share buyback policy. The Board has developed a process with a number of 'triggers' set by absolute and relative level of share price discount over various time periods. Where two or more such 'triggers' are activated, the Board is informed and a decision is taken as to whether to allocate resources to buying back shares. Any such buybacks are viewed with suitable caution, reflecting the relative merits of any immediate gain with the considerable impact utilising current cash has on long term NAV growth.

Dividends

With regard to the level of dividend payments, as I have stated in the past, HgT's ability to pay dividends is increasingly driven by the levels of income that are created through the activities of Hg. This is a somewhat unpredictable exercise from one year to the next and thus the view of the Board is to establish what it considers a reasonable basis for a 'floor' for the dividend level which is currently set at 5 pence per share. Should circumstances change, I will of course communicate with shareholders at the appropriate time.

Debt facility

The final element of the capital allocation policy relates to the use of leverage. HgT uses a Revolving Credit Facility of £350 million at the end of 2023, to support the implementation of the investment strategy. The principal purpose of the facility is to support the programme of investment activity.

Balance sheet

A key role of the Board is continually to look to balance HgT's future commitments to Hg funds, balance sheet and cash position, while maintaining a clear focus on risk. This is a continuous cycle of activity which has to adapt to unpredictable events. In the last year, HgT has invested in upgrading the tools used to manage this process, aligning them with similar tools that Hg, the Manager, uses to manage its own investment activity. As a result, the Board benefits from being able to assess the various scenarios with a greater degree of granularity which should benefit the quality of decision making.

As one of the tools used to manage the balance sheet, HgT has a revolving credit facility to support the investment programme and to improve balance sheet efficiency. In 2023, HgT increased its facility to £350 million, c.15% of NAV, consistent with the historical sizing of this facility. Post the year-end the Board has agreed to increase this to £375 million. This will aid HgT's future cash flow management.

HgT continues to benefit from a unique opt out clause within its underlying investment agreements with Hg, which provides a useful risk management tool for the Board in managing and optimising the HgT balance sheet.

HgT portfolio management

As I noted in the 2022 full year report and in the 2023 interim report, the Board looks to take advantage of market driven opportunities to manage the portfolio construction of HgT, seeking to achieve the optimal balance of asset and vintage exposure across the various Hg fund structures.

Over 2023, HgT completed the sale of c.25% of HgT's remaining investment in Hg's Genesis 8 Fund, delivering a return of 3.2x invested cost. This transaction was priced at 100% of Hg Genesis 8's December 2022 NAV and provides further strong validation of the HgT valuation policy, generating net proceeds to HgT of just over £91 million. In April 2023, the Board and the Manager also agreed to take advantage of the opportunity to resize HgT's original commitment to Hg Saturn 3, reducing it by c.15%, in light of a review of changes in the investment landscape before the final closing of the vehicle. The transaction not only allows for significant cash to be returned to HgT at attractive valuations, but allows for increased investment, particularly through increased exposure to co-investments where HgT has a stated goal of investing 10% to 15% of capital. A final benefit of these adjustments is that they provide a mechanism to help manage the single asset concentration in the largest individual investments in the portfolio.

Impact and responsible investment

Your Board and the Manager, Hg, continue to increase their focus on the topics of ESG and sustainability. We share a firmly held view that not only should the financial returns to you, the shareholders, be attractive, but these must be delivered in a manner which is consistent with our responsibility to society. As a technology investor, we understand the need to ensure that those businesses in which we invest reduce their carbon footprint and contribute to tackling climate change.

The UN Principles for Responsible Investment (UNPRI) assessment of Hg's approach to responsible investment is 4* (82/100) for Investment Stewardship Policy and 5* (100/100) for Private Equity, and the Board of HgT meets regularly with the Hg Responsible Investment team to ensure that Hg's work is well understood and endorsed by the Board. As we have previously reported, Hg launched The Hg Foundation in 2020 - a charitable initiative to provide funding and operational support to initiatives across Europe, the UK and the US. The Hg Foundation's goal is to have an impact on the development of those skills and learning most required for employment within the technology industry, focusing on individuals who might otherwise experience barriers to access this education. This Foundation is funded by the Hg management company and its team members.

Responsible Investment:
see pages 32 to 33 of the Manager's Review of the full Annual Report and Accounts for the year ended 31 December 2023.

The Hg Foundation:
see page 33 of the Manager's Review of the full Annual Report and Accounts for the year ended 31 December 2023.

Board and governance

As I noted in my previous statement, HgT embarked on a process to find a new Non-Executive Director to replace Anne West, who will not be standing for re-election to the Board at the AGM in May 2024, after ten years of service. On behalf of the Board, I would like to extend special thanks to Anne as she steps down. Anne has made a very significant contribution to HgT over her ten years on the Board and we thank her for her all her efforts on behalf of HgT.

As we announced at the end of last year, our Board colleague, Guy Wakeley, announced his decision to step down from the Board. On behalf of myself and my fellow Directors, I would also like to thank Guy for his important contribution to HgT throughout his time on the Board, which has benefited from his experience in listed companies, governance and especially in risk.

With Guy's departure, we have begun the process to find a new Non-Executive Director and an external search firm has been engaged to support the Nomination Committee and the Board in delivering a successful outcome to this process, noting the skills and experience which would be most additive to HgT. Any announcements regarding this process will be made in due course.

In November 2023, HgT was pleased to announce the appointment of Helena Coles as a Director to the Board. Helena has over 20 years of investment experience, has considerable expertise in ESG, gained through the perspectives of an asset owner, fund manager, as well as UK regulator, and co-founded and built a successful fund management firm with peak AUM of over $10bn. We are delighted to welcome Helena to the Board and look forward to her insightful contributions. 

I am pleased to report that the annual Board review process undertaken over the year and externally supported, shows the Board to be functioning very well. As part of the continuous effort to improve governance, the Board implemented a new software tool, BoardClic, to provide more objective insights into the effectiveness of the Board, by comparing the performance of the HgT Board with a large peer set. We have now used this tool for two years to provide instant feedback after each Board meeting and also to support the two annual Board review cycles. I am pleased to say that the results of the annual review process revealed the HgT Board to be amongst the highest scoring Boards on the platform, with a marginally higher overall score this year than last, in the 90th percentile against peers.

Nomination Committee report see page 104 of the corporate governance section of the full Annual Report and Accounts for the year ended 31 December 2023.

Prospects

HgT has delivered a resilient performance over 2023, with the underlying portfolio continuing to deliver strong growth. Investment activity was slower in the first half of the year as the prevailing high degree of uncertainty and tight capital markets conditions combined to make transactions challenging. However, this activity accelerated in the second half of the year and into 2024, as conditions improved and as the market looked favourably on the kinds of high-quality assets that make up the HgT portfolio.

The significant liquidity generated in the period, not only validates the market value of the assets in the portfolio, but further strengthens the balance sheet to be able to capitalise on future opportunities as they present themselves. With our defensive portfolio of companies and prudent management of the balance sheet, HgT is well positioned to take advantage of investment opportunities as they arise, and the Board remains positive for both transaction activity and portfolio performance in the year ahead.

Jim Strang, Chairman, 8 March 2024

MANAGER'S UPDATE

In a world of rising labour costs, freeing up people for high value tasks is of material economic benefit to businesses, especially during the recent period of elevated inflation.

David Toms, Head of Research, Hg

The second half of 2023 saw a rapid improvement in investor sentiment in public markets, particularly with reference to software and services businesses. Our suggestion at the Interims that we thought it would be 'brave' to extrapolate the first half's strong multiple progression into the second half of the year was partially correct, as multiple expansion slowed significantly in H2 but still ended the year ahead of June levels, and well ahead of December 2022.  By the end of 2023, much of the 2022 decline in multiples had been reversed, and once we incorporate the benefits of earnings growth, the largest software and services index closed 2023 at all-time highs.

As we have previously commented, our valuation methodology attenuates the volatility of public markets by including private comparables, which are often more representative of the price paid for full control, rather than the marginal price of trading a share. As a result, our multiples are generally more stable than public multiples; this was the case during 2022 (when our multiples saw less of a decline) and 2023 (when we didn't have the same 'trough' to rebound from). If we look across the whole two year period, our multiples have moved in a similar range to the largest public software index, and our NAV has outperformed by 6%, driven largely by our superior earnings growth.

Our expectation of a strong first half to 'sustain in the second half' proved correct, and the software and services sector in fact saw an acceleration in forecast earnings growth in the second half. Through 2023 there was also a strong trend of software and services companies reporting 'stabilisation' in their earnings calls, vs. 2022's frequent reports of 'macro headwinds'.

The portfolio has seen less volatility than public markets, and our organic EBITDA growth has materially outperformed public peers - both the broad market, and software and services focused businesses. When we compare the performance with these peer groups, we can see both the attraction of software and services with its steadier growth, and the relative outperformance of our portfolio, against a publicly listed portfolio from the sector.

The excitement around Generative AI during the year, highlights the value in automating complex workflow. We've previously commented on the ability of our portfolio and our industry to drive productivity in complex tasks. In a world of rising labour costs, freeing up people for high value tasks is of material economic benefit to businesses, and we saw the impact of this during the recent period of elevated inflation. Although inflation is declining, there is clear evidence that labour shortages will be a long-term structural issue for decades to come. We expect this to underpin continued robust growth in the demand for automation.

In the short term, although our trading (earnings) performance is well ahead of publicly listed peers, our portfolio value has lagged its public peers during 2023. This reflects much less aggressive multiple expansion in our valuation models, versus that experienced in the public markets. No doubt the debate about who is 'right' when it comes to valuations will persist, but from our perspective, when we see public company multiples double or halve in a matter of months, based on very limited (and sometimes no) changes to underlying earnings forecasts, we are not convinced this always forms the correct frame of reference for 'right'.

As we have previously indicated, in any quarter, there are two main factors influencing our valuations:

•  Valuation change in public comparators, of which we, very broadly, see around half the impact in any one quarter. Our valuation model is driven partly by such inputs, but also by less volatile, longer-term M&A comparables in the public and private markets.

•  Growth in earnings. Our companies have typically grown their EBITDA historically by 10-15% organically each year, i.e. c.3% each quarter, and approximately double this on an 'all in' basis including M&A.

The relative pace of both movements (rating changes can be relatively rapid; earnings growth tends to be much steadier) dictates movements in any one quarter, but over time, earnings growth tends to dominate.  

Looking to 2024, we would be very surprised to see a repeat of 2023's multiple expansion. However, in our view, when set against the broader market context, software does not feel overly exposed at present, particularly given the stability of its growth and the long-term opportunities; we expect robust organic earnings growth (the ultimate long-term driver of value) to continue. 

In our view, sector sentiment is likely to be underpinned by a modestly improving economic backdrop - we have already seen signs of this in early earnings reports, and the sector has got off to a strong start in 2024 both from the perspective of multiples and earnings. Beyond this, for our portfolio, M&A remains a key driver of outperformance and we continue to execute on a strong set of opportunities.

We have prioritised returning cash, whilst continuing to back businesses that we believe can produce enduring growth.

Luke Finch, Head of Client Services, Hg

Activity levels 

As previously stated, in any rolling 12-month period, the investment teams across Hg look to make between 8 and 16 new platform investments in total across the active Hg Saturn, Hg Genesis and Hg Mercury funds, and we also seek to deliver similar numbers of liquidity events (sales or partial sales of investments and refinancings) each year. We believe the pace of investment should continue at broadly this level over the medium term. Activity at Hg's Investment Committee accelerated in the second half of 2023 and we think provides a good leading indicator of activity levels in 2024. 

M&A activity within the existing portfolio remains high. From any new investments we make, there is a further flow of M&A opportunities, adding to the breadth and depth of our organic development, and catalysing cross sales to existing and acquired customers. The strength of portfolio M&A reflects a more liquid and attractive pricing environment for these, typically smaller, opportunities. We have previously indicated a run-rate of somewhere in excess of 100 such acquisitions a year, and we are running at over twice that rate at present. The valuations for such investments tend to be around half the level of the platform companies that are acquiring them, providing an attractive source of enhanced returns. 

To give a further sense of scale, the combined enterprise value of the businesses within Hg's portfolio now totals to over $130 billion at 31 December 2023.

OVERVIEW OF THE UNDERLYING INVESTMENTS

held through HgT's limited partnerships

Investments (in order of value)		Fund	Sector	Location	Year1	Residual cost £000	Total valuation2 £000	Portfolio value %	Cum. Value %
1	Access	S3/G8/HGT	ERP & Payroll	UK	2020	145,255	304,200	12.3	12.3
2	Visma	G7/S1/S2/HGT	Tax & Accounting/ERP & Payroll	Scandinavia	2020	81,123	216,048	8.7	21.0
3	IFS Workwave	S3/HGT	ERP & Payroll	Scandinavia	2022	114,248	123,989	5.0	26.0
4	Howden	S3/HGT	Insurance	UK	2021	59,553	123,525	5.0	31.0
5	Litera	G8/G9	Legal & Regulatory Compliance	N.America	2019	28,919	110,826	4.5	35.5
6	Septeo	G9	Legal & Regulatory Compliance	France	2020	53,671	105,259	4.2	39.7
7	IRIS	S1	Tax & Accounting/ERP & Payroll	UK	2018	36,380	98,563	4.0	43.7
8	Ideagen	G10/G9/M3	Legal & Regulatory Compliance	UK	2022	68,257	93,496	3.8	47.5
9	GGW	M2/M3	Insurance	Germany	2020	19,019	92,149	3.7	51.2
10	P&I	S1/HGT	ERP & Payroll	Germany	2020	53,376	84,929	3.4	54.6
11	FE fundinfo	M2/G9	Fintech	UK	2017	26,154	77,841	3.1	57.7
12	insightsoftware	S2/HGT	Tax & Accounting	N.America	2021	53,056	74,427	3.0	60.7
13	team.blue	G10/G8	Tech Services	Benelux	2018	36,861	69,703	2.8	63.5
14	Sovos	S2/HGT	Tax & Accounting	N.America	2020	49,593	58,678	2.4	65.9
15	Argus Media	S1/HGT	Fintech	UK	2020	24,183	49,893	2.0	67.9
16	Norstella	M2/G9/HGT	Healthcare IT	N.America	2021	29,274	48,289	1.9	69.8
17	Trackunit	G9	Automation & Engineering	Scandinavia	2021	26,593	46,566	1.9	71.7
18	Waystone	S2	Legal & Regulatory Compliance	UK	2022	40,904	39,430	1.6	73.3
19	Citation	G8	Tech Services	UK	2020	18,890	39,227	1.6	74.9
20	Benevity	S2/HGT	ERP & Payroll	N.America	2021	32,124	39,176	1.6	76.5
21	Rhapsody	M2/M3/HGT	Healthcare IT	N.America	2018	20,814	38,786	1.6	78.1
22	Gen II	G9	Fintech	N.America	2020	19,921	35,935	1.4	79.5
23	Prophix	G9	Tax & Accounting	N.America	2021	17,139	35,296	1.4	80.9
24	Caseware	G8	Tax & Accounting	N.America	2020	21,255	34,746	1.4	82.3
25	MeinAuto	G8	Automation & Engineering	Germany	2017	25,233	33,993	1.4	83.7
26	Azets	G7/HGT	Tax & Accounting	UK	2016	20,966	33,545	1.4	85.1
27	TeamSystem	G8	Tax & Accounting/ERP & Payroll	Italy	2021	10,586	31,897	1.3	86.4
28	HHA	G9	Healthcare IT	N.America	2021	24,035	30,994	1.2	87.6
29	Project CH	S2	Tax & Accounting	Germany	2021	18,393	29,563	1.2	88.8
30	smartTrade	M2/HGT	Fintech	France	2020	18,862	27,263	1.1	89.9
31	DEXT	S1/HGT	Tax & Accounting	UK	2021	15,620	25,954	1.0	90.9
32	LucaNet	G9	Tax & Accounting	Germany	2022	15,649	24,226	1.0	91.9
33	Nitrogen	M3/HGT	Fintech	N.America	2021	15,868	20,045	0.8	92.7
34	Intelerad	G8	Healthcare IT	N.America	2020	11,870	17,360	0.7	93.4
35	Pirum	M3/HGT	Fintech	UK	2022	13,928	16,998	0.7	94.1
36	F24	M2/HGT	Tech Services	Germany	2020	11,291	16,630	0.7	94.8
37	GTreasury	M4/HGT	Tax & Accounting	N.America	2023	15,008	16,126	0.6	95.4
38	Auvesy	M3	Automation & Engineering	Germany	2021	8,130	15,142	0.6	96.0
39	Geomatikk	M2/HGT	Tech Services	Scandinavia	2021	11,392	15,002	0.6	96.6
40	Mitratech	G7/HGT	Legal & Regulatory Compliance	N.America	2017	3,328	13,722	0.6	97.2
41	Fonds Finanz	M3	Insurance	Germany	2022	8,309	12,905	0.5	97.7
42	Revalize	G9	ERP & Payroll	N.America	2021	18,839	11,759	0.5	98.2
43	TrustQuay	M3	Fintech	UK	2022	8,970	10,999	0.4	98.6
44	Serrala	G9	Tax & Accounting	Germany	2021	23,086	10,569	0.4	99.0
45	Bright	M3	ERP & Payroll	Ireland	2021	6,529	10,165	0.4	99.4
46	JTL	M4	ERP & Payroll	Germany	2023	7,559	7,667	0.3	99.7
47	NomadIA	M3	ERP & Payroll	France	2023	6,014	6,980	0.3	100.0
48	Blinqx	M3	ERP & Payroll	Benelux	2022	3,833	5,542	0.2	100.2
49	Silverfin	M2/HGT	Tax & Accounting	Benelux	2019	1,132	4,692	0.2	100.4
	Total buyout investments (49)					1,400,992	2,490,715	100.4	100.4
	Other		Hedges and other fund interests			13,539	(8,867)	(0.4)	(0.4)
	Total all investments					1,414,531	2,481,848	100.0	100.0

¹ Where re-investment has occurred the investment date is based on the closing of the largest tranche of the investment holding.

² Including accrued income of £130.8 million, but before a deduction for the provision for carried interest of £211.4 million and fund level facilities of £355.8 million. Note that the investments held at fair within the Balance Sheet on page 57 of the full Annual Report and Accounts for the year ended 31 December 2023 exclude accrued income but include the deduction for carried interest and the fund level facilities.

DIVIDEND

The final dividend proposed in respect of the year ended 31 December 2023 is 4.5 pence per share (following the interim dividend of 2.0 pence, bringing the full year dividend to 6.5 pence per share).

Ex-dividend date (date from which shares are transferred without dividend)	21 March 2024
Record date (last date for registering transfers to receive the dividend)	22 March 2024
Last date for registering DRIP instructions (see below)	29 April 2024
Dividend payment date	21 May 2024

NOTICE OF ANNUAL GENERAL MEETING

The Annual General Meeting of the Company will be held on Thursday, 16 May 2024 at 11.00 am at the offices of Hg, 2 More London Riverside, SE1 2AP.  The formal Notice of AGM can be found within the Annual Report.  The Board is of the opinion that the passing of all resolutions being put to the AGM would be in the best interests of HgT and its shareholders. The Directors therefore recommend that shareholders vote in favour of all resolutions as set out in the Notice of Meeting (pages 119 to 125 of the Annual Report available on HgT's website) as they intend to do in respect of their own shareholdings.

 FURTHER INFORMATION

HgT's Annual Report and Accounts for the year ended 31 December 2023 (which includes the notice of meeting for the Company's AGM) will be available today on www.hgcapitaltrust.com

It will also be submitted shortly in full unedited text to the Financial Conduct Authority's National Storage Mechanism and will be available for inspection at data.fca.org.uk/#/nsm/nationalstoragemechanism in accordance with DTR 6.3.5(1A) of the Financial Conduct Authority's Disclosure Guidance and Transparency Rules.

ENDS

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on this announcement (or any other website) is incorporated into, or forms part of, this announcement.

 

END