Annual Financial Report
H gCapital Trust plc
ANNUAL Results for the YEAR ended 31 DECEMBER 2019
London, 9 March 2020: HgCapital Trust plc ("HGT"), which provides investors with a listed vehicle that invests primarily in unquoted software and service businesses, across Europe, managed by Hg, today announces its annual results for the year ended 31 December 2019.
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 companies where value can be created through strategic and operational change.
CONTINUED Strong NAV performance PRIMARILY driven by ROBUST double-digit revenue and EARNINGS growth
SUMMARY performance
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29 February |
31 December |
31 December |
% Total |
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Share price |
£2.39 |
£2.58 |
£1.79 |
+47.5% |
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NAV per share |
£2.55 |
£2.55 |
£2.16 |
+20.8% |
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FTSE All-Share Index |
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+19.2% |
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2019 |
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Net Asset Value |
£1.04bn |
£1.04bn |
£805m |
+£235m |
1
Total return assumes reinvestment of all historic dividends
Note: All figures have been adjusted for the 10:1 share-split in May 2019
Source: Hg, Factset
KEY HIGHLIGHTS 2019
¡ Net assets of more than £1 billion, with continued outperformance of the FTSE All-share over one, three, five, ten and twenty-year periods
- Share price total return of 47.5% to 31 December 2019.
- NAV per share of £2.55, a total return of 20.8%.
- Proposed final dividend of 3 pence per share (full year dividend of 4.8 pence per share).
- An investment of £1,000 twenty years ago would now be worth £15,516, a total return of 1,452%. An equivalent investment in the FTSE All-Share Index would be worth £2,569
¡ Strong growth from the realised and unrealised portfolio
- Revenue and EBITDA growth of 24% and 35% respectively across the top 20 investments (92% of the portfolio) over the last twelve months.
- £117 million of cash returned to HGT through realisations at uplifts to book value and refinancings.
- Valuation multiple (EV/EBITDA) of 19.8x and net debt to EBITDA ratio of 6.2x for the top 20 investments.
¡ Continued investment and commitments to drive future value
- £117 million invested on behalf of HGT into companies that the Manager has known for many years.
- New commitment to Hg Saturn 2 of $400 million announced, which will be deployed over the next four to five years.
¡ Increased focus on liquidity, more regular and transparent reporting
- First placing of new shares for nine years, at a premium to NAV, raising £75 million (after all expenses) of equity over 2019. This will be used to fund future commitments to Hg funds and further co-investment in Hg portfolio companies.
- Introduction of quarterly valuations to improve market transparency.
- Ten for one share-split in May 2019 to help increase share liquidity.
¡ Roger Mountford will step down as Chairman and will be succeeded by Jim Strang
- Jim Strang will be appointed as Chairman with effect from the end of the AGM, after he is re-elected as a Director.
- The process of selecting a Chairman was led by Anne West, Senior Independent Director.
- A recruitment process to fill the vacancy created by the Chairman's retirement is under way.
POST PERIOD EVENTS AS AT 29 FEBRUARY 2020
¡ NAV per share of £2.55.
¡ Share price of £2.39, year-to-date performance of -7.2%.
¡ Pro-forma liquid resources post-completion of all announced transactions and the proposed dividend payable in May 2020, are £82 million (8% of 29 February NAV).
¡ Pro-forma outstanding commitments of £536 million (52% of 29 February NAV). We expect these to be drawn down over the next four to five years.
THE MANAGER'S Outlook
§ A very strong year of performance for HGT with the portfolio seeing consistent double-digit growth.
§ Hg continues to invest in "sweet-spot" businesses in eight end-markets, or "clusters", where it has many years' knowledge.
§ A focus on operational improvement continues to drive performance and deliver significant network benefits.
§ Further liquidity events expected over the next twelve months through both exits and refinancings.
§ Robust double-digit trading performance underpins confidence in the ongoing growth of a strong portfolio.
Strong earnings, realisations at uplifts to book value and supporting the management teams of the underlying portfolio businesses will continue to drive value for shareholders in HGT.
s
Roger Mountford, Chairman of HGT, commented:
"2019 not only saw excellent results but was a transformational year for HGT. I remain confident that, thanks to the skill and resources of Hg, the outstanding performance HGT has delivered will continue under Jim Strang."
- Ends -
The Company's 2019 Annual Report and a video from the Manager to accompany the results are available to view at: http://www.hgcapitaltrust.com/ .
For further details:
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HgCapital Trust plc |
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Laura Dixon (Senior Investor Relations Manager, Hg) |
+44 (0)20 7089 7888 |
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Brunswick |
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Samantha Chiene and Alice Gibb |
+44 (0)20 7404 5959 |
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
HgCapital Trust plc
Annual report and accounts - 31 December 2019
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.
HGT provides investors with exposure to a fast ‑ growing network of unquoted investments, primarily in software and service businesses across Europe.
References in this Annual Report and Accounts to HgCapital Trust plc have been abbreviated to 'HgCapital Trust' or 'HGT'.
Hg refers to the trading name of Hg Pooled Management Limited and HgCapital LLP.
Hg Pooled Management Limited is the 'Manager'.
References in this Annual Report and Accounts to 'Total Return' refer to a return where it is assumed that an investor has re ‑ invested all historic dividends at the time when they were paid.
References in this Annual Report and Accounts to pounds sterling have been abbreviated to 'sterling'.
Financial highlights
Annualised share price total return over the last 20 years: +14.7%
2019 performance:
______________________________________________________________________________________________________
Share price
at 31 December 2019 was 257.5p a total return for the year of:
+47.5%
(2018: +3.5%)
______________________________________________________________________________________________________
Market capitalisation
The market capitalisation of HGT at 31 December 2019 was:
£1.05bn
(2018: £666m)
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NAV per share
at 31 December 2019 was 255.1p a total return for the year of:
+20.8%
(2018: +14.3%)
Please refer to Note 10(b) in the full Annual Report and Accounts for further detail on calculation of NAV per share
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Net assets
The total NAV of HGT at 31 December 2019 was:
£1.04bn
(2018: £805m)
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Full-year dividend
4.8p
(2018: 4.6p)
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Total ongoing charges
The total ongoing charges for the year to 31 December 2019:
1.6%
(2018: 1.9%)
Please refer to page 110 in the full Annual Report and Accounts for further detail on the calculation of ongoing charges.
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Top 20 investments as at 31 December 2019:
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LTM sales growth
+24%
(31 Dec 2018: +25%)
_____________________________________________________________________________________________________
LTM profit growth
+35%
(31 Dec 2018: +27%)
_____________________________________________________________________________________________________
EV to EBITDA multiple
19.8X
(31 Dec 2018: 17.3x)
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Net Debt to EBITDA ratio
6.2X
(31 Dec 2018: 5.6x)
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These figures are calculated on a value‑weighted basis. For further information on the top 20 portfolio trading performance and valuation and net debt analysis, please refer to Hg's review below (and on pages 42 to 43 of the full Annual Report and Accounts).
Balance sheet analysis as at 31 December 2019:
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Liquid resources
(18% of NAV)
£189m
In addition, HGT has an undrawn bank facility of £80 million.
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Outstanding commitments
(32% of NAV)
£336m
These commitments will be drawn down over the next 12 months and are likely to be partly financed by cash from future realisations. Future commitments are likely to be drawn over a period of four to five years (2020 - 2025).
HGT can opt out of a new investment without penalty, should it not have the cash available to invest.
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An active pipeline of investment opportunities led to new and follow-on investments, whilst returning cash to HGT through both realisations and refinancings.
Investment and realisation activity in 2019:
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Realisations for the benefit of HGT
£117m
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Cash invested on behalf of HGT
£117m
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For further information on investment and realisation activity over the year, please refer to sections below and pages 46 to 50 in the full Annual Report and Accounts.
Historical total return performance
Both HGT's share price and net asset value per share have continued to outperform the FTSE All‑Share Index.
| One % | Three | Five | Ten | Twenty |
Share price | 47.5 | 22.2 | 23.1 | 15.0 | 14.7 |
NAV per share* | 20.8 | 18.8 | 18.0 | 13.4 | 13.1 |
FTSE All‑Share Index | 19.2 | 6.9 | 7.5 | 8.1 | 4.8 |
Share price performance relative to the FTSE All‑Share Index | +28.3 | +15.3 | +15.6 | +6.9 | +9.9 |
NAV per share performance relative to the FTSE All‑Share Index | +1.6 | +11.9 | +10.5 | +5.3 | +8.3 |
*Please refer to Note 10(b) on page 90 of the full Annual Report and Accounts for further detail on the calculation of NAV per share.
Based on HGT's share price at 31 December 2019 and allowing for all historic dividends being reinvested, an investment of £1,000 made twenty years ago would now be worth £15,516, a total return of 1,452%. An equivalent investment in the FTSE All-Share Index would be worth £2,569.
Ten year dividend record
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 |
Final dividend (pence) | 2.8 | 1.0 | 2.3 | 2.9 | 3.2 | 4.0 | 4.6 | 3.0 | 3.0 | 3.0 |
Special dividend (pence) | - | - | - | - | 1.9 | - | - | - | - | - |
Interim dividend (pence) | - | - | - | - | - | - | - | 1.6 | 1.6 | 1.8 |
Total dividend (pence) | 2.8 | 1.0 | 2.3 | 2.9 | 5.1 | 4.0 | 4.6 | 4.6 | 4.6 | 4.8 |
Chairman's statement
"2019 not only saw excellent results but was a transformational year for HGT"
Roger Mountford, Chairman, HgCapital Trust plc
Dear Shareholder
I am very pleased to report that 2019 not only saw excellent results but was a transformational year for HGT. Highlights included:
• Having been admitted to the FTSE 250 in October 2018, HGT consolidated its position in the Index, with market capitalisation increasing from £666 million at December 2018 to over £1 billion in December 2019.
• Introduction of quarterly valuations as a further step in giving the market transparency to support active trading in our shares.
• A 10-for-1 share split, reflecting the enormous growth in net asset value per share over the last decade, resulting in a more liquid market in our shares.
• Our first placing of new shares for nine years, at a premium to NAV, with a number of new institutional shareholders joining HGT's register.
• A series of tap issues of new shares providing more opportunities for investors to add to their holdings, increasing the amount raised from new equity to £75m.
Performance
HGT's net asset value increased to 255.1 pence per share at year end (2018: 215.7 pence, adjusted for the share split), an increase on a total return basis of 20.8% over the year.
More than 75% of the increase in value of unrealised investments arose from increases in profits rather than valuation multiples. This impressive result would have been even stronger but for volatility in the value of sterling which led to a 4% reduction in net asset value.
Following the increase in interim dividend from 1.6 pence to 1.8 pence per share, the Board is recommending a final dividend of 3.0 pence, making a total of 4.8 pence per share. We are also revising our guidance and we anticipate total dividends in future years to be not less than 4.8 pence per share.
Our share price recovered quickly from the market's nervous period in late 2018, reaching a price of 257.5 pence at year-end (2018: 178.5 pence, adjusted for the share split).
This represented a total return to shareholders in the year of 47.5%, out-performing the FTSE All-Share Index by 28.3%. More importantly, we sustained our long-term record of out-performance of the wider market, at more than 15% p.a. over the last three and five years. Over the last twenty years our share price total return has been 14.7% p.a., out‑performing the All-Share Index by close to 10% p.a.
This long‑term record was recognised by the Association of Investment Companies, which marked the twentieth anniversary of ISAs by identifying the investment trusts that delivered the highest returns to investors who subscribed to an ISA over that period. HGT delivered a return that put it well into the top ten UK listed investments. We anticipate that an up to date calculation will be published soon, reconfirming HGT's record as one of the most rewarding long-term investment opportunities for regular savers.
I am pleased also to report that HGT was awarded Investment Company of the Year by Investment Week in the private equity and growth capital sector. This is the ninth time that HGT has been selected for this award. It reflects, I believe, not only another outstanding year's return but also the consistency of returns we have delivered and the quality and transparency of our reporting to investors. The citation described HGT as "the Gold Standard of private equity Investment Trusts".
Realisations
Following a period of 2 years in which Hg sold a total of 19 investments, this was a relatively quiet year for realisations; two businesses were sold: Foundry and Register, achieving multiples of cost of 2.1x and 4.2x respectively. Cash proceeds were also received from the refinancing of several businesses we continue to hold. We also realised our interest in one of two legacy renewables funds. In total, we received proceeds of £117 million.
Investments
This annual report goes further than before in describing the investment strategy of our manager, Hg. Their approach is to invest primarily in two market sectors-software and services-and in eight "clusters" based on the end-market users of the software or services. This degree of focus enables Hg to identify large numbers of opportunities, track them often for years, make highly informed investments, and have a repeatable and iterative strategy for value enhancement based on prior experience with comparable businesses.
Hg's emphasis is on teamwork among its 120 investment and portfolio management professionals. Investments are not the personal choice of individual fund managers. Every investment must be supported by Hg's investment committee and their large deal teams are composed of experienced investors from across the firm and its London, Munich and New York offices. Moreover, Hg has built a 30-strong Portfolio Team comprising experienced senior managers from industry and specialised business analysts; their role is to support the development of transformational strategies for each business we acquire and to give hands-on assistance to the business in implementing strategic and operational change. This work not only enhances revenue growth and profitability but also, in recognition of the enhanced sustainability of the business, leads to higher multiples being achieved when we sell. In certain cases where a business continues to have opportunities to grow strongly, whether organically or by acquisition, or improve margins, we are happy to remain invested over a longer period than often observed in the private equity market; for example, we have been invested in IRIS since 2004 and Visma since 2006.
Having successfully adopted cloud-based software across much of the portfolio, Hg is now an early mover in applying other new technologies that the digital revolution is bringing forward. Notable among these are Artificial Intelligence and Machine Learning; a description of this investment opportunity and case studies, are set out below (or on pages 36 to 38 in the full Annual Report and Accounts).
Hg's scale enables collaboration across the portfolio, ensuring that best practice and past experience are shared among the managers of the 30-odd businesses in which we are invested. Sections below (or pages 28 and 29 in the full Annual Report and Accounts) describe how Hg has created an online community for its management teams and regularly brings them together to encourage informal co-operation and mutual support.
During the year, we invested £117 million in three new investments, Transporeon, Litera, team.blue and a follow-on in Lyniate (formerly known as Rhapsody)-one in each of four clusters in which Hg has been investing for between five and fifteen years. In addition, we made a further investment in Visma, a core holding within another cluster where Hg has acquired enormous depth of expertise over a long period.
New commitments
Shareholders will be familiar with the commitment-investment-realisation cycle that underpins our business. Every four years or so HGT and Hg's other institutional clients make commitments to invest in a "vintage" of new opportunities over the following four to five years. HGT thereby enables private investors, wealth managers and smaller institutions to invest alongside the world's largest institutional investors in businesses that would otherwise be inaccessible to our investors-and to do so on identical terms but with the added advantages of a listed investment vehicle and the corporate governance framework and transparency of an investment trust.
We are now in discussion with Hg about making new commitments to invest in parallel with their new Hg Saturn 2, Hg Genesis 9 and Hg Mercury 3 funds. Our first new commitment is to invest $400 million in Hg Saturn 2, a fund designated in US dollars and designed to make large acquisitions. We expect Hg Saturn 2 will make around 8-10 investments in total, with HGT investing around $40-50 million in each holding. Further commitments to invest in Hg Genesis 9 and Hg Mercury 3, consistent with our long-term strategy, will be agreed in the coming weeks. In all cases, we will continue to have the benefit of an "opt-out" from our commitment to invest in any new investment if we do not have sufficient funds available.
Co-investment
The Board actively manages HGT's balance sheet in order to keep it well invested but without taking unacceptable risk.
In addition to our commitments to Hg's vintages, we have also agreed to a programme of co-investments in businesses held by Hg, in addition to our core holdings. The Board and the Manager have agreed to aim to have co-investments represent 10 to 15% of HGT's NAV, even as our NAV continues to grow in coming years.
Currently, co-investments are valued at £143 million, representing 14% of NAV as at 31 December 2019 - and we have agreed three further co‑investments, totalling an estimated £19 million, in Argus Media, P&I and smartTrade since the period end.
All our co-investments are free of management fees, reducing the ongoing charges and free of carried interest.
Responsible investment
The Board fully understands and endorses the increasing emphasis on responsible investment that wider society, and investors, expect listed companies of all kinds to respect.
In particular, we understand the need to ensure that the businesses we invest in reduce their carbon footprint and contribute to tackling climate change. The sectors in which we invest are unlikely to raise ethical issues and are not in themselves large sources of carbon emission. However, the technologies within our software businesses can assist other types of business to make progress, as described in a case study below (or on page 35 in the full Annual Report and Accounts).
During 2019, Hg itself was independently certified as a Carbon-Neutral Company. I am pleased to report that the assessment by UNPRI of Hg's approach to responsible investment increased from AA to AA++ during the year.
Corporate governance
Our reporting on corporate governance is further expanded this year. In particular, below we set out a full report on how we meet the duties placed on directors under Section 172 of the Companies Act. I am confident that we have always properly undertaken our duties to shareholders and other stakeholders, considered our impact on the community and environment, and taken a long-term approach to the management of HGT. This new report brings together in one place our beliefs, values and actions.
We are also committed to follow the AIC Code of Corporate Governance and an expanded report on our compliance is set out on pages 115 to 118 in the full Annual Report and Accounts.
During 2019 we agreed new policies on Board composition and tenure and on maintaining the culture of HGT.
These policies are linked because it is important that we maintain a culture of informed challenge and open debate by ensuring that the Board has the right balance of experience and fresh thinking. Our policy is to seek to recruit a new director every two years or so, which is likely to result in an average tenure of around six years, but we do not set a maximum tenure as this could lead to the loss of valuable corporate knowledge.
In 2018 we recruited two new non-executive directors to the Board. In 2019 the Board agreed a set of interlocking processes that will lead to a further refreshing of the Board in 2020. I indicated in our Interim Report that I intended to stand down as Chairman in 2020. Accordingly, the Board's Nomination Committee, led by Anne West, the Senior Independent Director, took responsibility for the selection of a new Chair; her report on this process appears on page 124 in the full Annual Report and Accounts.
I am delighted to report that Jim Strang, who will stand for re-election as a Director at the forthcoming AGM, will be appointed as my successor.
Simultaneously, we began a review of the effectiveness of the Board and its committees so that the conclusions would be available as I hand over to my successor, giving the incoming Chair an up-to-date and Independent analysis of the strengths and weaknesses of the Board and identifying options for change; this effectiveness review was externally facilitated by Trusted Advisor Partnership, a specialist in this field. Thirdly, my retirement from the Board creates a vacancy for a new director. The role profile and skill set we seek are informed by insights from the effectiveness review. Following the successful recruitment of two directors in 2018, the Board has again retained nurole.com, an online and active recruitment specialist, to conduct this search. Once again, we have given clear instructions that they should to bring forward a diverse range of candidates. The selection process is being led by our Senior Independent Director and my successor as Chairman and I am pleased to report that, at the time of writing, we have a long list of 12 qualified candidates, well balanced between women and men.
As a further element in our framework of good corporate governance, at this year's AGM we will propose a resolution extending the life of HGT by a further five years, matching the investment period of the current range of funds to which we are making commitments. The Board has confidence in the continuing opportunity that HGT offers to investors and we recommend this resolution to shareholders for their support.
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"I remain confident that, thanks to the skill and resources of Hg, the outstanding performance HGT has delivered throughout my period of service will continue."
Roger Mountford, Chairman, HgCapital Trust plc
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Risks and prospects
During 2019, we have carefully reviewed our risk management framework, which we have strengthened to include an integrated view of investment, financial, operational and external risks. Through this framework the Board is able to ensure that HGT's portfolio of investments are aligned to our risk appetite, and predictive and preventative steps can be taken where necessary. This risk management framework is an important element of the culture of the Board and the relationship with the Manager.
At each meeting of the Board we receive detailed trading information and reports on every business in our portfolio. Recent reports have shown that, almost without exception, the investments we hold are growing and trading well; in 2019 the top 20, representing 92% of our portfolio, reported aggregate revenues of £4.0 billion, EBITDA of £1.2 billion and an EBITDA margin of 29%, compared with 27% in 2018. With revenues growing by 24% p.a. overall, these figures evidence the quality of our portfolio and the effectiveness of Hg's processes.
It is, of course, too early to know the future trading relationship between the UK and the EU, but as Hg and the Board have said before, the businesses we own undertake little cross-border trading and are therefore not greatly exposed to any new friction in trade. We have some exposure to volatility in exchange rates and have taken action to adopt a more sophisticated approach to managing currency risk. At the time of writing, it is impossible to forecast the scale and severity of the coronavirus epidemic in China and elsewhere, or the impact it will have on supply chains to the global manufacturing sector and thereby on the global economy and capital markets. As we have no direct exposure to the manufacturing or retail sectors, any effects on our portfolio would be indirect, via levels of corporate investment in software or valuation multiples. The automotive cluster is clearly the most exposed to supply chain disruption for the OEMs and Hg is monitoring this cluster especially closely.
As I prepare to step down at the forthcoming annual general meeting I remain confident that, thanks to the skill and resources of Hg, the outstanding performance HGT has delivered throughout my period of service will continue. I take this opportunity to thank all the partners and staff of Hg who have made such an impressive contribution to HGT's success, and to my fellow directors past and present for their wise counsel. My successor, Jim Strang, is uniquely well qualified to lead the Board of HGT in the next stage of its journey and I wish him and the Board and Hg continuing success.
Roger Mountford
Chairman
6 March 2020
Investment objective and investment policy
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 companies where value can be created through strategic and operational change.
Investment policy
The policy of HGT is to invest, directly or indirectly, in a portfolio of unlisted companies where Hg believes it can add value through increasing organic growth, generating operational improvements, driving margin expansion, reorganisation or by acquisition to achieve scale. HGT seeks to maximise its opportunities and reduce investment risk by holding a spread of businesses diversified by end-market and geography.
Risk management
HGT has adopted formal policies to control risk arising through excessive leverage or concentration. HGT's maximum exposure to unlisted investments is 100% of the gross assets of HGT from time to time. On investment, no investment in a single business will exceed a maximum of 20% of gross assets. HGT may invest in other listed closed‑ended investment funds up to a maximum at the time of investment of 15% of gross assets.
Sectors and markets
As HGT's policy is to invest in businesses in which Hg can play an active role in supporting management, Hg primarily invests in companies whose operations are headquartered or substantially based in Europe. These companies operate in a range of countries, but there is no policy of making allocations to specific countries or markets. Investments are made across a range of sectors where Hg believes that its skills can add value, but there is no policy of making allocations to sectors.
HGT may, from time to time, invest directly in private equity funds managed by Hg where it is more economical and practical so to do.
Leverage
Each underlying investment is usually leveraged but no more than its own cash flow can support, in order to enhance value creation; it is impractical to set a maximum for such gearing across the portfolio as a whole. HGT commits to invest in new opportunities in order to maintain the proportion of gross assets that are invested at any time, but monitors such commitments carefully against projected cash flows.
HGT has the power to borrow and to charge its assets as security. The Articles restrict HGT's ability (without shareholder approval) to borrow, to no more than twice HGT's share capital and reserves, allowing for the deduction of debit balances on any reserves.
Hedging
Part of HGT's portfolio is located outside the UK, predominantly in Northern Europe, and a further part in businesses that operate in US dollars. HGT may therefore hold investments valued in currencies other than sterling. From time to time, HGT may put in place hedging arrangements with the objective of protecting the sterling translation of a valuation in another currency. Derivatives are also used to protect the sterling value of the cost of investment made or proceeds from realising investments in other currencies, between the exchange of contracts and the completion of a transaction.
Commitment Strategy
HGT employs a commitment strategy to ensure that HGT's balance sheet is managed efficiently. The level of commitment is regularly reviewed by the Board and Hg.
Liquid funds
HGT maintains a level of liquidity to ensure, so far as can be forecast, that it can participate in all investments made by Hg throughout the investment‑realisation cycle.
At certain points in that cycle, HGT may hold substantial cash awaiting investment. HGT may invest its liquid funds in government or corporate debt securities, or in bank deposits, in each case with an investment grade rating, or in managed liquidity funds that hold investments of a similar quality.
If there is surplus capital and conditions for new investment appear to be unfavourable, the Board will consider returning capital to shareholders, probably through the market purchase of shares.
Any material change to HGT's investment objective and policy will be made only with the approval of shareholders in a general meeting.
Rationale and business model
The Board has a clear view of the rationale for investing in unquoted businesses where there is the potential for accelerating the growth in value through a private equity approach. This informs its decisions on the operation of HGT and the evolution of HGT's Business Model.
Rationale
The Board believes that there is a convincing rationale for directly investing in well‑researched private businesses where there is potential for substantial growth in value, especially where there is the ability to work with management to implement strategic or operational improvements.
By taking on the burdens of administration, monitoring and accounting that such investments require, HGT offers a simple and liquid means by which shareholders can achieve an investment in unquoted growth companies, monitored by a Board of independent Directors.
Business model
To achieve HGT's Investment Objective and within the limits set by the Investment Policy, HGT is an investor in unquoted businesses managed, and in most cases controlled, by the Manager. From time to time, HGT may hold listed securities in pursuit of its Investment Policy.
HGT is currently invested in more than 30 companies as set out below (and on page 52 in the full Annual Report and Accounts), ranging in size, sector and geography, providing diversification.
The Board has delegated the management of HGT's investments to Hg Pooled Management Limited (the 'Manager' or 'Hg'). Further details of the terms of the management agreement are set out on page 110 in the full Annual Report and Accounts. The Manager invests predominantly in unquoted software and service businesses in expanding sectors and provides portfolio management support. Hg's review below (and on pages 23 to 75 in the full Annual Report and Accounts) outlines how HGT's investments are managed on behalf of HGT.
Most of HGT's investments are held through special-purpose partnerships, of which it is the sole limited partner.
Periodically, HGT enters into a formal commitment to invest in businesses identified by the Manager, alongside institutional investors who invest in an Hg Limited Partnership Fund. Such commitments are normally drawn down over three to four years. The institutional investors and HGT invest on substantially identical terms.
HGT is usually the largest investor in each business. The Board has a further objective of keeping HGT as fully invested as is practical, while ensuring that it will have the necessary cash available when a new investment arises.
The Board, on the advice of the Manager, makes assumptions about the rate of deployment of funds into new investments and the timing and value of realisations. However, to mitigate the risk of being unable to fund any draw‑down under its commitments to invest, the Board has negotiated a right to opt out, without penalty, of its obligation to fund such draw‑downs where certain conditions exist.
HGT may also take up a co‑investment in some businesses (in addition to the investment it has committed to make).
HGT has no liability to pay fees on such co‑investment and no carried interest incentive is payable to the Manager on realisation (currently 14% of HGT's NAV is in co‑investments). HGT may also offer to acquire a limited partnership interest in any of Hg's funds, in the event that an institutional investor wishes to realise its partnership interest.
The Board regularly monitors progress in all the businesses in which it is invested, and their valuation; the development of the Manager's investment strategy; the resources and sustainability of the business model.
Investment trust status
As HGT is constituted as an investment trust and its shares are listed on the London Stock Exchange, it can take advantage of tax benefits available to investment trusts. This allows HGT to realise businesses from its portfolio without liability to corporation tax. The Board intends to retain this status so long as it is in shareholders' interest to do so. This will require the Board to declare dividends so that not more than 15% of taxable income is retained each year.
Performance targets
HGT's aim is to achieve returns in excess of the FTSE All‑Share Index over the long‑term. To this end, the Board monitors the Key Performance Indicators, as set out above (or on pages 5 and 6 in the full Annual Report and Accounts). In the year to 31 December 2019, HGT's NAV per share increased by 20.8% on a total return basis. The FTSE All‑Share Index increased by 19.2% on a total return basis over the year. The twelve month total return of HGT's share price was 47.5%. NAV per share has grown by 13.4% p.a. compound over the last ten years and 13.1% p.a. compound over the last twenty years. The share price has seen broadly similar performance growing by 15.0% p.a. compound over the last ten years and 14.7% p.a. compound over the last twenty years.
All of the above returns assume the reinvestment of all historical dividends. The Board and the Manager aim to continue to achieve consistent, long‑term returns in this range.
HGT is not managed so as to reflect short‑term movements in any Index. The Board also regularly compares HGT's NAV and share price performance against a basket of broadly comparable companies with similar characteristics, listed on the London Stock Exchange.
Dividends
In 2017, the Board announced that it anticipated that future dividends would be no less than 4.6p (adjusted for the share split) per share and that these would be split between an interim distribution made in or around October, and a final distribution made in or around April.
We are also revising our guidance and we anticipate total dividends in future years to be not less than 4.8 pence per share.
Where possible, the Trust has elected to 'stream' its income from interest‑bearing investments as dividends for tax efficiency purposes. More details can be found on page 134 in the full Annual Report and Accounts.
Going concern
HGT's business activities, together with the factors likely to affect its future development, performance and financial position are described in the Board's Strategic Report and Hg's Review. The financial position of HGT, its cash flows, liquidity and borrowing facilities are described in the Strategic Report.
In addition, Note 19 to the financial statements describes HGT's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk. The Directors have considered the FRC Guidance on Risk Management, Internal Control and Related Financial and Business Reporting and believe that HGT is well placed to manage its business risks successfully. The Directors review cash flow projections regularly, including important assumptions as to future realisations and the rate at which funds will be deployed into new investments. The Directors have a reasonable expectation that HGT will have adequate resources to continue in operational existence for at least the next twelve‑month period from the date of approval of this Report and be able to meet its outstanding commitments. Accordingly, they continue to adopt the going concern basis in preparing these results.
At this year's AGM the Board will propose a resolution to extend the life of HGT by a further five years, matching the investment period of the current range of funds to which HGT is making commitments. The Board has confidence in the continuing opportunity that HGT offers to investors and recommends this resolution to shareholders for their support.
Long‑term viability statement
In accordance with provision 31 of the 2018 revision of the UK Corporate Governance Code, the Directors have assessed the prospects of HGT over a longer period than the twelve months required by the 'Going Concern' test. The Board believes that the appropriate period over which to assess HGT's viability may vary from year to year, depending on a number of factors, notably its outstanding investment commitments, which at year end run until 2020‑2021. In addition, the Board believes that it should assess the viability of HGT over a minimum of five years and, accordingly, has elected this year to assess HGT's viability over the five‑year period ending December 2024.
The key assumption which underpins our strategic planning is that HGT's business model remains broadly unchanged and continues to focus on investing in unquoted businesses managed by Hg.
Assessment of prospects
The Board has assessed HGT's prospects and long-term viability with due consideration to:
• HGT's position with reference to the business model (above and on pages 14 and 15 in the full Annual Report and Accounts);
• the balance sheet, cash flow projections and availability of funding (below and on pages 43 to 44, 78 and 94 in the full Annual Report and Accounts )
• HGT's contractual commitments (below and on page 44 in the full Annual Report and Accounts);
• the principal risks and uncertainties associated with HGT, including: performance; regulatory; operational; financial; liquidity; and borrowing, as detailed below (and on pages 16 and 17 of the Strategic Report in the full Annual Report and Accounts).
Sensitivity analysis
The Directors of HGT have looked at the sensitivity of the business model against principal risks likely to have an impact including:
• Insufficient funds to meet commitments;
• A downturn in the macro-economic environment; and
• The effect of Brexit on HGT and the portfolio companies.
Based on this assessment, the Directors of HGT confirm that they expect HGT will continue to operate and meet its liabilities, as they fall due, during the five years ending December 2024.
Principal and emerging risks and uncertainties
During 2019 the Audit and Valuation Committee ('AVC') has supported the Board in the creation of a strengthened Risk Management Framework, undertaking a robust assessment of the principal and emerging risks facing HGT.
Managing risk is fundamental to the delivery of HGT's strategy, and this framework provides the rigour to assess and manage these risks, the controls in place to mitigate them, including those that would threaten its business model, future performance, solvency, valuation, liquidity or reputation.
The Board has defined risk appetite statements for each of the risks faced during the course of business. By assessing the impact and likelihood of each risk against HGT's appetite, we ensure that focus is maintained on the risks that require most attention, and that mitigating actions are progressed.
This process involves the maintenance of a risk register, which identifies the risks facing HGT and assesses each risk and classifies the likelihood of the risk and the potential impact of each risk on HGT. The Board has established controls to mitigate against risk faced by HGT. The AVC regularly reviews the policies for managing each risk, as summarised below.
HGT considers its principal risks (as well as underlying risks) in four main categories:
Investment - the risk to HGT of an inappropriate investment strategy or Manager decisions leading to poor performance.
Financial - a range of risks that include valuation risk and liquidity risk ensuring the availability of sufficient liquid resources for HGT to meet its commitments.
Operational - the monitoring of regulation, Hg's internal controls systems and those of HGT's other service providers.
External - macro-economic conditions, foreign currency, availability of credit.
Potential risk | Potential impact | Mitigation | Trend |
Investment |
|
|
|
Performance: | • Reduction in NAV • Reputation loss • Shareholders sell shares • Equity reduced | • Deployment of capital is a rigorous process determined by the Hg Investment Committee operated by experienced investment professionals. • The HGT AVC values the portfolio quarterly. | Neutral |
Performance: | • Reduction in NAV • Reputation loss • Shareholders sell shares • Equity reduced | • Portfolio performance is reviewed regularly by Hg's Realisation Committee comprised of experienced investment professionals. • The Board monitors the performance of Hg's portfolio through regular reporting (including trading, compliance and finance). • An operational performance group interacts across the portfolio to drive performance. | Reducing |
Potential risk | Potential impact | Mitigation | Trend |
Financial |
|
|
|
Valuations: | • Create a false market in HGT shares • Reputation loss • Reduced shareholder loyalty • Impact on liquidity and ability to raise equity | • All valuations are prepared in accordance with IPEV guidelines, unless these differ from UK GAAP or company law when the accounting standards apply. • The Manager's Valuation Committee, independently chaired, reviews and approves valuations on a quarterly basis. • The auditors of both Hg and HGT review the valuation and methodology as part of their audit procedures which are reviewed in detail by the HGT AVC and put to the Board of HGT for approval. • Hg's finance team conducts detailed reviews of all reporting materials published to ensure their accuracy. | Neutral |
The Balance Sheet: | • Reputation • Risk to future performance | • Forward cash flows are closely monitored by the Board and Hg. • Borrowing structures and cash flow forecasts are considered at each HGT Board meeting. • Current £80m bank facility as a short-term bridge if required. • There is the opt-out facility available across all investing funds. | Increasing |
The Balance Sheet: | • Insufficient borrowing to meet commitments • Potential for rising interest rates • Increased cost | • A bank facility is in place to facilitate orderly management • There is the opt-out facility across all investing funds. | Neutral |
Operational |
|
|
|
Regulation: | • Increased corporation tax leading to higher fees and potential impact on valuation and performance of HGT | • The Manager monitors investment movements, the level and type of forecast income and expenditure, and the amount of retained income (if any) to ensure that the provisions of Sections 1158 and 1159 of the CTA are not breached. HGT's compliance with the conditions for retaining investment trust status is certified by the Manager at each meeting of the Board. | Neutral |
Regulation: Lack of adherence to changing regulations. | • Misunderstood or misreported regulation leading to reduced demand for shares • Lack of adherence to regulation leading to Reputational risk | • Strong shareholder engagement from: - Dedicated investor relations team - Corporate Broker - Company Secretary • All these are regularly reviewed by the Board. | Neutral |
Manager Internal Controls and Processes: | • Reputational risk • Shareholders sell shares • Equity reduced | • The Manager is regulated by the FCA, whose rules and regulations impose exacting behavioural standards on Hg. • The Manager has controls in place including those related to investment decisions; portfolio reviews; recruitment, training & promotions; financial performance and payments; protection of client assets; compliance; and regulation. • The Board of HGT regularly reviews these processes and controls. | Neutral |
Cyber security: | • Loss of or lack of control over data due to cyber attacks • Reputational risk • Regulatory risk | • A cyber security team is in place at the Manager to monitor and recommend improvements in cyber security across Hg and the portfolio companies. • Most recently, the GDPR committee has successfully implemented mandatory training for all staff.
| Increasing |
Potential risk | Potential impact | Mitigation | Trend |
External |
|
|
|
Political and macro-economic uncertainty: | • Reduction in demand for shares based on lack of confidence in listed markets | • Hg's portfolio is well protected given focus on mission critical products with a fragmented customer base. • The Manager remains focused on the various issues that may need to be addressed, including: - Reduced availability of credit to fund future investments - Regulation, marketing, trade and foreign exchange movements These are regularly monitored by the Board of HGT. | Neutral |
Foreign exchange: | • Valuations lowered by negative currency movements • Valuations increased by positive currency movements | • The Board of HGT regularly monitors currency fluctuations. • All transactions are hedged between signing and exit.
| Neutral |
Global pandemic | • Operations are disrupted by reduced resources • Revenues decrease due to reduced sales effectiveness · Multiples of listed companies applied to valuations might be adversely affected
| • The majority of revenues are derived from subscription based, recurring revenues for non-discretionary technology platforms. | Increasing |
Environmental, Social and Governance Matters
Socially responsible investment
The Board has endorsed Hg's policy to invest in a socially responsible manner, as set out below (and on pages 32 to 33 in the full Annual Report and Accounts) and on their website at www.hgcapital.com/responsibility. HGT's focus is on identifying high‑quality and sustainable businesses, and supporting their growth for the benefit of shareholders and wider society. The Board monitors investment activity to ensure they are compatible with these policies.
HGT has no employees and has limited direct impact on the environment. HGT aims to conduct itself responsibly, ethically and fairly and has sought to ensure that Hg's management of investments takes account of social, environmental and ethical factors where appropriate. The sectors in which the Manager invests do not generally raise material ethical issues.
Employees, human rights and community issues
The Board recognises the requirement under section 414C of the Companies Act 2006 to provide information about employees, human rights and community issues, including information in respect of any policies it has in relation to these matters and their effectiveness. These requirements do not apply to HGT as it has no employees, all of the Directors are non‑executive and it has outsourced all its functions to third party providers. HGT has therefore not reported further in respect of these provisions.
Modern Slavery
HGT has no employees of its own. The Directors are satisfied that, to the best of their knowledge, Hg complies with the provisions of the UK Modern Slavery Act 2015. For further information please visit: https://hgcapital.com/wp-content/uploads/2019/10/ModernSlavery2019.pdf
Diversity
All financial decisions are made under conditions of uncertainty. The Board recognises the value of both identity and cognitive diversity in ensuring that varied perspectives are considered when making decisions.
The Board places value on attracting directors with diverse outlooks and experience. The skills and experience that the current members of the Board bring to HGT's leadership are described on pages 108 to 109 in the full Annual Report and Accounts . The Board's policy is to make appointments to the Board to achieve the balance of skills, outlook and experience needed and to do so solely on merit. At the end of the year under review, the Board of Directors of HGT comprised five men and one woman. HGT seeks to enhance diversity and looks for the best qualified male and female candidates. The Manager has an equal opportunities policy and currently employs 111 men and 81 women. Nic Humphries, Senior Partner, Hg, is a member of the Level 20 Advisory Council, a not‑for‑profit organisation that aims to inspire more women to join and succeed in the European private equity industry. Details of Hg's diversity and inclusion initiatives can be found below and on page 31 in the full Annual Report and Accounts.
Directors' duties
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Section 172 of the Companies Act 2006
Section 172 of the Companies Act 2006 (the 'Act') requires directors to act in good faith and in a way that is the most likely to promote the success of HGT. In doing so, directors must take into consideration the interests of the various stakeholders of HGT, the impact HGT has on the community and the environment, take a long-term view on consequences of the decisions they make, as well as aim to maintain a reputation for high standards of business conduct and fair treatment between the members of HGT.
______________________________________________________________________________________________________
Fulfilling this duty naturally supports HGT in achieving its Investment Objective and helps to ensure that all decisions are made in a responsible and sustainable way. In accordance with the requirements of the Companies (Miscellaneous Reporting) Regulations 2018, below, the Board explains how the Directors have individually and collectively discharged their duties under section 172 of the Act over the course of the reporting period.
To ensure that the Directors are aware of, and understand, their duties, they are provided with a tailored induction, including details of all relevant regulatory and legal duties as a Director of a UK public limited company when they first join the Board, and continue to receive regular and ongoing updates and training on relevant legislative and regulatory developments. They also have continued access to the advice and services of the Company Secretary and, when deemed necessary, the Directors can seek independent professional advice. The schedule of Matters Reserved for the Board, as well as the Terms of Reference of its committees are reviewed annually and further describe Directors' responsibilities and obligations and include any statutory and regulatory duties.
Culture
During the year, the Directors also considered and defined HGT's culture and values and have worked to incorporate these behaviours and processes into the annual review of the Manager, strategic planning, the annual evaluation of Board effectiveness and reporting to stakeholders - thus embedding consideration of stakeholders' interests, long-term perspective, maintaining reputation for fairness and high standards of governance, corporate reporting and business conduct more generally in HGT's culture and processes.
Decision-making
The importance of stakeholder considerations, in particular in the context of decision-making, is regularly brought to the Board's attention by the Company Secretary and taken into account at every Board meeting, and a paper reminding Directors of that is tabled at the start of every Board meeting. For example, the strategic planning discussions involve careful considerations of the longer-term consequences of any decisions and their implications on shareholders and other stakeholders, and are supported by detailed cash flow projections based on various scenarios, which include: assumptions around HGT's contractual commitments; availability of funding; borrowing; foreign currency management; as well as the wider economic conditions and market performance.
Community and Environment
The Board recognises that HGT has a responsibility to its shareholders, stakeholders and wider society. The Board endorses Hg's policy to invest HGT's funds in a socially responsible manner. This includes the desire that the businesses Hg invests in are genuinely focused on making a positive contribution to all stakeholders including employees, customers, suppliers, shareholders and the wider society. Responsible investing also means investing in growth companies and sectors, rather than turnaround or distressed investing. Hg has been a signatory of the UN Principles for Responsible Investment ('UNPRI') since 2012 and the Board has welcomed Hg's continuing commitment to set ambitious goals for various aspects of environmental, social, and governance ('ESG') matters. Further details on how Hg integrates responsible investing into the investment process can be found below (or on page 32 in the full Annual Report and Accounts).
The Board and Hg also recognise the impact climate change has on the environment and society. The Manager is committed to measuring and managing the carbon emissions associated with its business operations, although a large part of Hg's impact is generated by the portfolio companies. Hg therefore continues to work with them to raise awareness on climate change risks, carbon emission and energy efficiency. Hg is a certified Carbon Neutral company, committing to zero emissions by offsetting its entire carbon footprint.
The Board monitors investment activity to ensure it is compatible with the policy and receives periodic updates from the Manager on its initiatives and performance against its ESG goals. The Hg Responsible Investment Report 2018, Hg Responsible Investment Policy 2019 and Hg 2019 Carbon Footprint Report can be found on Hg's website: https://hgcapital.com/responsibility/
Business Conduct
HGT aims to conduct itself responsibly, ethically and fairly and has sought to ensure that Hg's management of investments takes account of social, environmental and ethical factors where appropriate. As described below (or on page 22 in the full Annual Report and Accounts), in 2019 the Directors considered HGT's purpose and values and defined the Board's culture, the desired elements of it and ways to assess and monitor them. The Directors agree that establishing and maintaining a healthy corporate culture in amongst the Board and in its interaction with the Manager, shareholders and other stakeholders will support the delivery of its purpose, values and strategy.
The Matters Reserved for the Board, Board committees' terms of reference, the Share Dealing and other Board policies are all reviewed on at least an annual basis, and the Directors ensure that they appropriately define obligations and correct procedures.
The Report of the Audit & Valuation Committee, which can be found on pages 119 to 121 in the full Annual Report and Accounts, further explains how the Committee reviews the risk management and internal controls of HGT. This includes reasonably satisfying itself that relevant systems and controls in place remain effective and appropriate, that the Manager sets an appropriate 'control culture', and that Hg's whistleblowing procedures, Anti‑Bribery and Anti-Corruption policies are in place. Hg's Compliance Manager attends meetings to attest to the Board how Hg complies with these polices.
Stakeholders
The Board seeks to understand the needs and priorities of HGT's stakeholders and these are taken into account during all of its discussions and as part of its decision-making. While as an externally managed investment firm HGT does not have any employees or customers, the Board recognises its key stakeholders and the Board's beliefs and actions in relation to each group of stakeholders are described in the table below:
Stakeholders | Why they are important | Board engagement |
Shareholders | Continued shareholder support and engagement are critical to the continuing existence of the business and the delivery of its long-term strategy of its business. A resolution to continue the life of HGT is put to the shareholders every five years. Having last been approved by shareholders at its AGM in 2015, a similar resolution will be put to shareholders for approval at the upcoming AGM in 2020. | HGT has circa 900 shareholders, including institutional and retail investors. Over the years, HGT has developed various ways of engaging with its shareholders, in order to gain an understanding of their views. These include: • Annual General Meeting - HGT welcomes attendance from shareholders at our AGM. The Manager delivers a presentation and all shareholders have the opportunity to meet the Directors and ask questions. The Board really values the feedback and questions it receives from shareholders and takes action or makes changes, when and as appropriate; • Presentations - The annual and interim results presentations, as well as quarterly reports and monthly Factsheets are available on HGT's website, and their availability is announced via the stock exchange. Feedback and/or questions HGT receives from the shareholders help HGT to evolve its reporting, aiming to render the reports and updates transparent and understandable; • Investor Relations updates - at every Board meeting, the Directors receive updates on the share trading activity, share price performance and any shareholders' feedback, as well as any publications or comments in the press. To gain a deeper understanding of the views of its shareholders and potential investors, the Manager also undertakes Investor Roadshows following publication of HGT's results and an annual Capital Markets event. From time to time, the Board also commissions a perception study based on in-depth interviews of shareholders, analysts and other stakeholders. Their feedback is then taken into account when Directors discuss the share capital, any possible fundraisings or the dividend policy and put into action, if appropriate. The willingness of the shareholders, including the partners and staff of the Manager, to maintain their holdings over the long term period is another way for the Board to gauge how HGT is meeting its objectives; • Working with external partners - the Board also engages some external providers, such as investor communications advisors to obtain a more detailed view on specific aspects of shareholder communications, such as developing more effective ways to communicate with investors. An example of how the investment community feedback was heard and acted upon was the Board's decision to publish a dividend policy and introduce interim dividends in 2017. At the time, the Board recognised that, while HGT's assets are managed to achieve long-term growth in shareholder value, in a period of low interest rates and yields many shareholders wished to have some certainty about the likely levels of dividend payments. More recently, the Board also initiated a 10 for 1 share split to make trading in the shares easier, especially for retail investors. |
Service providers, including: |
| |
The Manager | Holding HGT's shares offers investors a liquid investment vehicle through which they can obtain exposure to Hg's diversified portfolio of private equity investments. The Manager's performance is critical for HGT to deliver its investment strategy successfully and meet its objective to provide shareholders with consistent long‑term returns in excess of the FTSE All‑Share Index. | Maintaining a close and constructive working relationship with the Manager is crucial as the Board and the Manager both aim to continue to achieve consistent, long-term returns in line with its investment objective. Important components in the collaboration with the Manager, consistent with the Board's culture, are: • Encouraging open discussion with the Manager; • Recognising that the interests of shareholders and the Manager (as well as its other clients) are for the most part well aligned, adopting a tone of constructive challenge, balanced when those interests are not fully congruent by robust negotiation of the Manager's terms of engagement; • Drawing on Board Members' individual experience to support the Manager in its monitoring and change management of portfolio companies, for the benefit of all the Managers' clients; and • Willingness to make the Board Members' experience available to support the Manager in the sound, long-term development of its business and resources, recognising that the long-term health of the Manager is in the interests of shareholders in HGT. |
Stakeholders | Why they are important | Board engagement |
Service providers, including (continued): |
| |
The Company Secretary, the Registrar, the Depositary, the Broker, the Asset Manager | In order to function as an investment trust with a premium listing on the London Stock Exchange, HGT relies on a diverse range of advisors to support meeting all relevant obligations. | The Board maintains regular contact with its key external providers, both through the Board and committee meetings, as well as outside of the regular meeting cycle. Their advice, as well as their needs and views, are routinely taken into account. In addition, the Management Engagement Committee, tasked with periodic reviews of the external service providers, also holds relationship meetings and formally hears, and acts on, their feedback, as appropriate. |
Lenders | Availability of funding and liquidity are crucial to HGT's ability to take advantage of investment opportunities as they arise. | Considering how important the availability of funding is, HGT aims to demonstrate to lenders that it is a well-managed business, and in particular, that the Board focuses regularly and carefully on the management of risk. |
Institutional Investors and proxy advisers | The evolving practice and support (or lack thereof) of the major institutional investors and proxy adviser agencies are important to the Directors, as HGT aims to maintain its reputation for high standards of corporate governance, which contributes to the long-term sustainable success of HGT. | Recognising the principles of stewardship, as promoted by the UK Stewardship Code, the Board welcomes engagement with all of its investors. The Board recognises that the views, questions from, and recommendations of many institutional investors and proxy adviser agencies provide a valuable feedback mechanism and play a part in highlighting evolving shareholders' expectations and concerns. As an example, the Chairman has frequently engaged directly with institutional investors and proxy advisors regarding resolutions that were proposed to HGT's shareholders at AGMs. |
Regulators | HGT can only operate with the approval of its regulators who have a legitimate interest in how HGT operates in the market and treats its shareholders. | HGT regularly considers how it meets various regulatory and statutory obligations and follows voluntary and best-practice guidance, whilst being mindful of how any governance decisions it makes can have an impact on its shareholders and wider stakeholders, in the short and in the longer-term. This year, HGT carefully considered the results of the review of HGT's Annual Results and Accounts for the year ended 31 December 2018, undertaken by the Conduct Committee of the Financial Reporting Council ('FRC')1. The FRC had not raised any questions or queries but did make some recommendations of improvements to our existing disclosures where they believed this would benefit the users of the accounts. The Directors welcomed the feedback, and where appropriate, the disclosures in this Annual Report and Accounts have been enhanced, incorporating the FRC's suggestions. |
1The FRC's review was based solely on HGT's 2018 Annual Report and Accounts and did not benefit from detailed knowledge of HGT's business or an understanding of the underlying transactions entered into.
Culture
During 2019, the Directors considered and defined HGT's culture, purpose and values. By formally identifying the important elements of HGT's culture, the Directors are able to assess and monitor it and ensure that it remains well aligned with HGT's purpose, values and strategy.
The culture of an externally managed investment trust is the product of the Board's diversity and behaviours, the values and behaviours of the Manager, and the way in which the Board and the Manager interact with each other and with stakeholders' of HGT.
Purpose, value and strategy
The Purpose of HGT is to deliver to shareholders 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. Through its Manager, HGT provides shareholders with exposure to a fast-growing network of unquoted investments, primarily in European software and service businesses. In providing access to investments not otherwise usually available to its shareholders, the HGT's values focus on transparency and clarity in its reporting, constructive challenge in maintaining a strong relationship with the Manager, and mitigating avoidable risk. The Board's strategy is to work closely with its selected Manager in a long-term relationship designed to support and encourage the Manager to build and maintain the skills and resources to deliver long-term, consistent returns through a concentrated portfolio of carefully selected businesses.
The Directors recognise the value in sustaining a culture that contributes to achieving the purpose of HGT in a way that is consistent with its values and strategy. Elements of culture include:
• Encouraging open and timely discussion within the Board and with the Manager, allowing time and space for original and innovative thinking;
• Ensuring that the interests of shareholders and the Manager (and its other clients) are well aligned, adopting a tone of constructive challenge, balanced when those interests are not fully congruent by robust negotiation of the Manager's terms of engagement;
• Drawing on Board Members' individual experience to support the Manager in its monitoring and change management of portfolio companies, for the benefit of all the Managers' clients;
• Willingness to make the Board Members' experience available to support the Manager in the sound long-term development of its business and resources, recognising that the long-term health of the Manager is in the interests of shareholders in HGT;
• Appreciating that the asset class, as well as the individual businesses in which HGT invests, are not well understood by all shareholders, adopting a policy of maximum transparency, consistent with the commercial interests of the portfolio companies, and clarity in reporting;
• Willingness to use all available means to communicate with shareholders and potential investors, and to meet shareholders and consider their views; and
• Acceptance that the prime purpose of HGT is to provide an efficient vehicle through which shareholders gain exposure to a well-managed, concentrated and leveraged portfolio and that the Board should not seek to add further investment risk.
A healthy corporate culture contributes to the long-term success of HGT. The following observable outcomes may be indicative of the Directors' success in embedding a healthy corporate culture in HGT's processes and policies, and actively promoting it through their behaviours:
• Continued support for HGT's shares and good, consistent trading performance;
• The breadth and quality of the share register, including willingness of shareholders to maintain their holdings over the long term rather than trade them short term;
• The extent to which the partners and staff of the Manager are willing to be long-term shareholders in HGT;
• Recognition of the transparency and clarity of reporting for HGT's reports to shareholders and disclosed on its website; and
• Recognition of the quality of the HGT's shares as an investment by the number of broker recommendations as a long-term hold.
The Board has worked to incorporate these behaviours and processes into the annual review of the Manager, strategic planning, the annual evaluation of Board effectiveness and reporting to stakeholders. These tend to embed the consideration of stakeholders' interests, a long-term perspective, the maintenance of a reputation for transparency and high standards of governance, corporate reporting and business conduct more generally into the HGT's culture and processes.
For and on behalf of the Board
Roger Mountford
Chairman of the Board
6 March 2020
Hg's review
Building businesses that change how we all do business
Hg is a specialist private equity investor focused on software and service businesses.
Our business model combines deep sector specialisation with dedicated operational support. Hg invests in growth companies in expanding sectors, primarily via leveraged buyouts in businesses with operations in or across Europe.
Hg's vision is to be the most sought-after private equity investor within our sector focus, being a partner of choice for management teams, to provide consistent, superior returns for HGT and our other clients whilst providing a rewarding environment for Hg colleagues.
References in this Annual Report and Accounts to the 'portfolio', 'investments', 'companies' or 'businesses', refer to a number of investments, held as:
• indirect investments by HGT through its direct investments in fund limited partnerships (HGT LP, HGT 6 LP, HGT 7 LP, HGT 8 LP, HgCapital Mercury D LP ('Hg Mercury'), HGT Mercury 2 LP, HGT Saturn LP and HGT Transition Capital LP) of which HGT is the sole Limited Partner;
• a secondary purchase of a direct interest in Hg's Genesis 6 fund through HgCapital 6E LP ('Hg6E'), in which HGT is a Limited Partner; and
• direct investments in renewable energy fund limited partnerships (Asper Renewable Power Partners LP ('Asper RPP I LP') and Asper Renewable Power Partners 2 C LP ('Asper RPP II LP'), of which HGT is a Limited Partner.
Hg Pooled Management Limited was authorised as an Alternative Investment Fund Manager with effect from 22 July 2014.
For further details, refer to pages 130 to 132 in the full Annual Report and Accounts.
About Hg
Overview
Hg began life as Mercury Private Equity, the private equity arm of Mercury Asset Management plc. Mercury Asset Management was acquired by Merrill Lynch in 1997. In December 2000, the executives of Mercury Private Equity negotiated independence from Merrill Lynch, and Hg was established as a fully independent partnership, owned entirely by its Partners and employees.
Since then, Hg has worked hard to develop a unique culture and approach - setting us apart from other investors. We are committed to building businesses that change the way we all do business, through deep sector specialisation and dedicated and strategic and operational support.
Today, Hg has close to 200 employees representing the largest technology investment team in Europe.
We have three investment offices based in London, Munich and New York, with funds under management of around £11 billion and serving more than 100 highly regarded institutional investors, including private and public pension funds, insurance companies, endowments and foundations.
Hg is itself an entrepreneurially led, fast growing business, 100% owned and managed by its Partners.
HGT is the largest client of Hg, which has been contracted to manage HGT's assets since 1994 and offers investors a liquid investment vehicle, through which they can obtain exposure to Hg's diversified network of unquoted investments with minimal administrative burdens, no long‑term lock up or minimum size of investment, and with the benefit of a Board of independent Directors and corporate governance. HGT's strategy is to invest in parallel with all of Hg's current funds.
Investment strategy
Hg's investments are primarily focused on defensive growth buyouts in software and service businesses operating in specific end-market 'clusters' with enterprise values ('EVs') of £50m to over £5bn, growing faster than the broader economy. We predominantly seek controlling buyout investments in Northern European headquartered businesses, though such companies will often have a global footprint and customer base.
Hg's objective is to pursue investment theses supporting long-term growth, leveraging its expertise working in these sectors to implement initiatives designed to maximise organic expansion, as well as through rolling up fragmented sectors, over typical hold periods of approximately five years.
Hg has led over 100 investments in the software and service sector during the last 25 years. This focus means we have developed an institutional expertise and a deep understanding of the markets and businesses in which we invest.
Hg applies a rigorous approach when evaluating all investment opportunities. Our objective is to invest in the most attractive businesses, rather than be constrained by a top‑down asset allocation.
This flexible approach to investment means that, at any given time, the Hg portfolio is likely to comprise more than thirty software and service businesses with similar characteristics, but of different sizes, end-market focus, and maturity profiles.
Hg's new office in New York will also enhance the ability to crystallise and develop transatlantic investment opportunities, manage existing investments and make bolt-on acquisitions; as well as continue to engage with - and ultimately sell - portfolio companies to North American trade buyers. As the US has the largest technology sector, this also helps consolidate Hg's position as Europe's leading software investor.
Hg Saturn
2018 - Large‑cap (EVs focus: >£1bn)
• Fund size: £1.5bn
• Typical hold: £400m-£500m
Hg Genesis
2017 - Mid‑market (EVs: £250m-£1bn)
• Fund size: £2.5bn
• Typical hold: £100m-£250m
Hg Mercury
2017 - Lower mid‑market (EVs: £50m-£250m)
• Fund size: £575m
• Typical hold: £30m-£60m
Transition Capital
2018 - Lower mid‑market (EVs: £50m-£250m)
• Fund size: £75m
• Typical hold: £15m-£30m
One strategy over four funds across the size range in software & service businesses
HGT has made commitments to invest on the same financial terms as all institutional investors in Hg funds, with investments made into businesses with enterprise values ranging from £50 million to over £5 billion.
The Power of the Portfolio
Hg has a unique approach and strategy, with a focus on achieving scale in tightly defined clusters of expertise.
As a result, we have assembled a large portfolio of companies and business models that share similar characteristics but differ in size and maturity. This creates a natural environment for knowledge sharing, creating a network effect to drive best practices and value creation initiatives. This is why we believe in collaboration and the 'power of the portfolio'.
This scale and focus enables our businesses to benefit from being part of one larger organisation, whilst retaining their own identity with each management team incentivised by their own success.
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On an aggregated basis, the Hg portfolio would represent the fourth largest, and fastest growing, software business in Europe.
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The 'Hg sweet-spot' business model
Hg has a clear and robust business model, focused on long‑term consistent and defensive growth, predominantly through investment in buyouts with a Northern European angle. We seek companies that share similar characteristics, often providing a platform for merger and acquisition ('M&A') opportunities.
We believe that such companies have the potential for significant performance improvement.
We invest primarily in two main market sectors:
Software
Software is our largest sector of investment. We focus on businesses providing B2B vertical market application software and data, regulatory software and fintech and internet infrastructure.
We have invested in high‑quality, industry champions which have strong sector reputations, diverse customer bases, and which feature subscription‑based business models generating predictable revenues and cash flows. With more than 25 software investments in our portfolio, we bring a unique set of networks and insights to help support value creation in our businesses.
Services
Our services investments focus on companies with high levels of intellectual property, large fragmented customer bases, long‑term and stable customer relationships, and businesses which provide business‑critical services, preferably on a repeat or recurrent basis.
We target businesses with strong reputations within a niche, and we aim to grow and scale these businesses, either organically within existing markets or through acquisitions.
Deep knowledge and networks within our end-market clusters
Hg has a unique approach and strategy, with a focus on achieving scale in tightly defined clusters of expertise. This specialisation helps us to build deep know-how.
Tax & Accounting 15 years
Team System, Visma, Sovos Compliance, Cogital Group, IRIS
ERP & Payroll 12 years
Team System, P&I, Visma, Access, IRIS, Transporeon
Legal & Regulatory Compliance 12 years
Achilles, Trace One, STP, Citation, Mitratech, Litera
Automotive 11 years
Eucon, Mobility Holding
SME Tech & Services 9 years
Commify, Register, IT Relation, team.blue
Capital Markets & Wealth Management IT 6 years
FE Fundinfo
Insurance 6 years
A-Plan Group, Eucon
Healthcare IT 5 years
Evaluate, Allocate, MediFox, Lyniate
Note: Number of years refers to the number of years that Hg has invested in each cluster
Working together
Sharing Hg know-how and experience
By virtue of the fact that Hg repeatedly invests in specific business models, our dedicated Portfolio Team has been able to tailor a differentiated approach to driving value creation during our ownership. Following each investment, our Portfolio Team works with the management of our investee companies to focus on a set of operational levers that are key to performance in an 'Hg sweet‑spot' business model: growth, digital marketing, value creation, customer success, technology, cyber security, product data analytics and talent. For each of these levers, the Portfolio Team has codified the Hg experience and best‑practices into set 'plays' which are deployed in collaboration with management.
Every company can access the team, but the nature of support can take a variety of forms. Often, members of our Portfolio Team provide direct support, taking on roles to help the business pursue growth more quickly. Another option is for our experienced industry experts to mentor senior executives, helping them build more scalable functions.
In other instances, the support comes through introducing management teams to their counterparts in other companies in which Hg is invested, specifically those who have faced comparable challenges.
Our focus areas
From sharing best-practice 'playbooks' and resources, through to tailored teams of technical experts, we work closely with the companies we invest in to make sure they get the tools and guidance they need for business success.
• Growth
• Technology, Product & Offshoring
• Talent & Organisation
• Data Analytics
• Finance & M&A
• Transformation
• ESG & Sustainability
• Reporting & Communities
Working together
We view all of our business management teams as a part of the Hg portfolio community. And that means promoting a culture of working together to share ideas, experiences, advice and best-practice.
One of the most powerful ways the Portfolio Team motivates change is through peer‑to‑peer collaboration. This gives the management teams of our portfolio companies the ability to exchange ideas, insights, share best practice and learnings with others in the Hg portfolio and our external network of experts.
In 2019, over 700 portfolio company executives attended 16 forums hosted by Hg covering topics such as employee engagement, neurodiversity, finance function excellence, product strategy, women in leadership, sales and marketing, and data analytics to name a few.
In 2020, we plan to host 60 portfolio engagements, in the form of summits, forums and webinars, whilst also utilising broader communications, such as podcasts.
Hive - Hg's online community for everyday collaboration
To enable the continued collaboration across the portfolio, Hg launched 'Hive', its online trusted environment, in 2018. With 23 live communities and over 1500 members, peer‑to‑peer collaboration is unparalleled. Individuals are able to pose questions, start discussions, share and collaborate on content, and have access to best practice methodologies from world‑class experts. This is a clear differentiator in the market.
>90%
members are from our portfolio companies
23
live communities
>1500
active members and growing!
For further information, please visit hive.hgcapital.com
Our team
c.200
members of the team
3
Investment offices in London, Munich and New York
Hg succeeds through the analysis and understanding of new and emerging dynamics in the clusters in which it invests. This requires profound knowledge of technology, markets and business practices. To this end, we employ diverse and exceptionally talented teams to identify and execute investment opportunities and accelerate value creation during our ownership.
This specialisation - both in investment selection and portfolio management - requires significant resources and we have built a business employing close to 200 people, including nearly 120 investment and portfolio management executives, and other professionals.
Our investment and portfolio executives come from a range of backgrounds and experience including private equity, consulting, investment banking, accounting and industry specialists. Our Portfolio Team is comprised of a mix of senior operators and functional specialists, who typically have many years of experience in their respective specialist operational and strategic roles.
Investing primarily in European businesses, many of which have a global footprint, requires time and a deep understanding of local cultures. Accordingly, our people come from around the globe, including sixteen European countries and the USA. Our Partners have, on average, fifteen years' experience in the management of private businesses.
Positioning ourselves as a best-in-class recruiter
Hg's recruitment and selection processes are rigorous and agile which, along with our strong brand, leadership, sector focus, fund performance and vibrant culture, allows us to attract and hire the best talent in our industry.
Improving our ability to identify talent
We have enhanced our talent processes so that we can identify and accelerate the development of our top performers and high potential talent within the business. We believe that this is the basis of effective career and succession planning.
Employee engagement
Our people are highly motivated by, and committed to, delivering outstanding value to HGT, our other institutional clients, and our portfolio company leadership teams. They are engaged by their work, our values and the opportunity to grow to their full potential within Hg.
Our values have evolved over many years and are embodied in our working culture; these are aligned with our performance and reward structures.
Hg works hard to ensure our employees are engaged. We use independent external benchmarks to gauge levels of engagement and take appropriate actions to ensure the highest possible levels of engagement.
We have a strong focus on career and personal development and provide a range of development opportunities to enable our talent to reach their full potential and perform at their best.
Developing future leaders
We are explicit about the behaviours we wish to encourage at Hg and have aligned recruitment, training, coaching, performance and rewards to our values - for everybody across the organisation, including our leadership.
A description of Hg's key staff is available at www.hgcapital.com/meet-us/
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"By continuing to invest in our people and our expertise, we are able to work with the best management teams in our target clusters and actively help them to build great businesses"
Steven Batchelor, Chief Operating Officer, Hg
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Diversity and inclusion
Hg has introduced a number of new policies in the last twelve months as part of a wider initiative around Diversity and Inclusion.
In line with this wider initiative, Hg is forming its first ever Diversity and Inclusion Steering Group, made up of representatives from across the firm. The Steering Group aims to promote a culture of inclusion that clearly values diversity in all its forms, including a number of global initiatives around gender balance, flexible working, mentoring programmes, training and awareness events.
Level 20
Hg will maintain its commitment to industry-wide initiatives such as Level 20, a not for profit organisation aligned around a common vision to inspire more women to join the industry. In 2019, Hg Senior Partner, Nic Humphries, joined Level 20's Advisory Council.
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"At Hg we aim to attract and maintain a team of the best possible investment and operational talent. To do this we need to ensure that we're building this team from the broadest range of potential employees.
Having a clear strategy and committed team looking at Diversity and Inclusion, with full support from the firm's senior leadership team, is crucial. "
Martina Sanow, Deputy Chief Operating Officer, Hg
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Responsible investing
Growing sustainable businesses which are great employers, have a low environmental impact and are good corporate citizens
Why responsible investing is important to us
For Hg, Responsible Investment ('RI') means growing sustainable businesses which are great employers, have a low environmental impact and are good corporate citizens, whilst generating superior risk adjusted returns for the millions of pensioners and savers globally whose funds are invested with Hg.
We want the businesses we invest in to be genuinely focused on doing well for all stakeholders including employees, customers, suppliers, shareholders and the wider society. We firmly believe that responsible business practices help generate superior long‑term performance.
Our responsible investing journey
2019 was a year of strong continued progress for Hg.
We set ourselves the vision to be the most sustainable private equity firm in Europe and we were proud to achieve the top score, AA++ from The United Nations-supported Principles for Responsible Investment (UNPRI).
All portfolio companies assessed for their ESG values and policies in 2018 were reassessed in 2019 and we are pleased to report that there have been some significant improvements in performance. We have also enhanced our ESG reporting capabilities by implementing our assessment into our financial reporting system, iLevel to give a holistic view of each business's sustainability.
Whilst 2018 saw a complete review, refresh and relaunch of Hg's Responsible Investment strategy, resulting in our brand new Sustainable Business framework, 2019 was a year of embedding this into business as usual and advancing to Sustainable Strategy 2.0.
Our Board approved Strategy includes:
• Understanding the climate change risks associated with our portfolio, as well as the impact we have as a firm - We have worked with PwC to conduct a Climate Change risk assessment across our portfolio.
• Becoming Carbon Neutral - Our 2019 Carbon Footprint report, see below (or page 34 in the full Annual Report and Accounts) , shows Hg's value chain carbon footprint and what we have done to offset our emissions and become Carbon Neutral.
• Charitable Giving - Hg is a longstanding supporter of many charities and we have recognised that we can do more to have a positive impact on society. We are therefore exploring options to focus specifically on technology and education for the less privileged and expect to roll out these exciting initiatives during the course of 2020.
ESG in the deal process
ESG is embedded into the entire deal process, from screening to exit. As a first step, we are very clear on the types of businesses we do not invest in, which is outlined in our exclusion list. During due diligence, we assess companies for compliance with relevant laws in relation to environmental, social, governance, health and safety, bribery and corruption issues.
We also consider the inherent ESG risk of the company and carry out an associated ESG review detailing risks and opportunities in relation to our Responsible Business framework (see below or page 33 in the full Annual Report and Accounts).
We take an active approach to managing ESG during our ownership. This starts with a Responsible Business onboarding and maturity assessment within the first months of acquisition to identify areas for improvement where Hg can support the companies to realise their ambitions within and beyond our Responsible Business framework.
As part of our on-going engagement on Responsible Business, each business is re-assessed on an annual basis and we follow up to ensure appropriate actions are taken to improve as required. Face-to-face forums helps our management teams to network, share best practice and receive support (see below or page 29 in the full Annual Report and Accounts).
PRI
A signatory to the UNPRI since 2012.
AA++ 2019 PRI Assessment Score:
'A+' for Strategy & Governance, and
'A+' for Private Equity Ownership
Our Responsible Business framework
Hg's Responsible Business framework outlines key ESG areas of focus for software and service companies.
The framework is based on extensive research and forms the foundation for the ESG assessments we conduct of our businesses as part of onboarding and annually thereafter.
Essentials
There are certain minimum ESG requirements that Hg expects from all our businesses. These include:
• Governance and Business Integrity, such as a company code of conduct, appropriate controls, board composition and appropriate health & safety and grievance procedures.
• Legal, Compliance and Risk, including compliance with all laws and regulations, active risk management, as well as standards and policies to combat bribery, corruption, money laundering, anticompetitive behaviour and other malpractice.
• Data and Cyber security, which includes Hg's minimum standards for cyber security along with appropriate information protection practices and GDPR compliance.
Employees
One of the most important assets of our businesses are the employees. A diverse workplace with engaged and motivated staff is vital for growth and business success. We look at employees from four aspects:
• Purpose and culture, including company vision, mission and values.
• Grow businesses and talent, including job growth, healthy staff turnover, talent management and succession planning.
• Engagement and motivation by promoting transparent communications, health and wellbeing, learning opportunities, recognition and good leadership.
• Diversity of talent and equal opportunities irrespective of ethnicity, gender, disability and background.
Society
We want all our businesses to strive for positive external impact by acting transparently and contributing to society through their business practices, charitable and community support and external relations. Our businesses impact society in a number of ways:
• Community engagement including apprenticeships, charitable giving and volunteering.
• Environmental impact, such as energy use, carbon footprints, data centre efficiency and waste management.
• Positive relationships with key external stakeholders including customers and suppliers.
• Transparency of company commitments and progress, including external reporting and sustainability communications.
For more information please go to www.hgcapital.com/responsibility
To watch our Responsible Investing video, please go to hgcapital.com/responsibility
Certified Carbon Neutral Company
CarbonNeutral.com
Hg recognises the impact climate change has on the environment and society.
By measuring and offsetting our carbon footprint, Hg aims to do its part in tackling global climate change whilst supporting sustainable development in local communities.
We strive to lead by example and are actively working with our portfolio companies to raise awareness on climate change.
The issue
As long ago as 1994, the United Nations Framework Convention on Climate Change recognised that the climate system can be affected by GHG emissions and ozone depleting substances (ODS). The consumption of fossil fuels, other industrial activities and deforestation generate the majority of GHGs, such as carbon dioxide, nitrous oxide, methane, chlorofluorocarbons (CFC), hydrochlorofluorocarbons (HCFC) and hydrofluorocarbons (HFC). These gases are collectively known as "greenhouse" gases since they do not interact with short wave radiation from the sun, instead they absorb the reflected long wave radiation from the earth's surface and re-radiate this energy within the earth's atmosphere as heat.
Methodology
This report outlines Hg's carbon footprint for the financial year 2018-19, which has been prepared by an external consultant, Natural Capital Partners, and includes our scope 1, 2 and 3 emissions: scope 1 accounts for the direct emissions from a company's operations; scope 2, the indirect emissions from a company's energy usage; and scope 3, any other indirect emission.
Hg's carbon footprint was quantified by reviewing all Hg premises' and employees' activity data in line with the GHG Protocol standard and applying the most relevant emission factors sourced from DEFRA's 2018 UK GHG Conversion Factors2 for Company Reporting. The emission sources included in Hg's 2018-19 report are:
Premises:
Mains gas and electricity consumption, transmission and distribution losses, water consumption, wastewater leaving the premises for treatment, as well as waste.
Business Travel:
Air travel including short- and long-haul flights. Rail including domestic journeys and Eurostar. Other forms of travel include taxi, as well as hotel stays.
Other:
Staff commuting including by car, rail, underground and taxi, as well as courier deliveries.
Offset and reduction
Hg offsets all carbon emissions by supporting the Acre Amazonian Rainforest project, which prevents deforestation and promotes sustainable economic livelihoods in the Brazilian Amazon1. With funds raised through carbon finance, the project is able to work with local communities to create models of economic development which avoid deforestation and protect the ecosystem. The project delivers four of the 17 Sustainable Development Goals:
Hg is a certified Carbon Neutral company, committing to zero emissions by offsetting our entire carbon footprint. We recognise that offsetting is one way to reduce our environmental impact. In addition, we are committed to understanding ways in which we can reduce our overall footprint and investigating options around procuring renewable energy.
1 https://www.naturalcapitalpartners.com/projects/project/acre-amazonian-rainforest-conservation
2 https://www.gov.uk/government/publications/greenhouse-gas-reporting-conversion-factors-2018
ESG case study: Transporeon value-chain
How creating a network effect using cloud technology platforms is reducing global carbon emissions
Overview
Hg is a strong advocate for how cloud technologies can significantly drive efficiencies within companies and across sectors. More efficient businesses mean lower levels of waste, which in turn is more sustainable.
In 2019, Hg invested in Transporeon, a cloud-based logistics platform, connecting over 1,200 shippers and c.90,000 carriers world-wide. Transporeon uses cloud technology to link all parties in the transport logistics supply chain to transport logistics platforms.
By creating a strong network effect through digitalisation, collaboration and big data, Transporeon enables more efficient sourcing, communication, collaboration and transactions in the logistics industry, which in turn helps to lower carbon emissions through a reduced number of empty cargo trucks (backhauls), reduced truck waiting times, as well as CO2 monitoring systems.
Overall, Transporeon helps to solve five key inefficiency challenges in the transport logistics sector:
1 Improving communication and transparency: easier, faster and integrated communication between carriers and shippers improves what has typically been a highly inefficient sector.
2 Reducing empty cargo trucks (backhauls): c.30% of trucks on the road today are empty. This contributes to unnecessary traffic congestion and CO2 emissions. By better linking up shippers and carriers, Transporeon's platform is helping to reduce empty mileage for carriers by up to 13%.
3 Reducing truck waiting times: Up to 90 minutes are wasted per truck when waiting to load or unload goods. Transporeon helps carriers to reduce truck waiting times by up to 30% and also to improve turnaround times by up to 20% through digitised appointment scheduling, security optimisation, enhancement of staff schedules and controlled inbound and outbound flow.
4 Manual processes: Phone calls, emails, faxes and manual paperwork are still commonly used in the freight industry. Transporeon helps carriers automate and replace manual systems, reducing the use of paper and cutting process costs up to 30%.
5 Helping carriers to calculate and monitor their carbon footprint: Transporeon also helps its clients to calculate the carbon footprint associated with transportation, adopting a standardised calculation method which is fully compliant to CEN EN 16258 standard. The calculated carbon footprint is directly displayed in the transport order - enabling clients to monitor and subsequently manage their carbon footprint.
Advanced Automation
AI and its application in the world of Tax & Accounting
The growth of enterprise resource planning (ERP), tax and compliance software has historically been driven by a requirement to help move businesses away from paper-based processes, to software-led workflows.
Hg has seen this evolution first hand, investing in this global growth story across the last two decades. This growth has been rapid and consistent, with thousands of small and medium-sized enterprises (SMEs) across the world now operating more efficiently, after digitising previously onerous processes.
Today we see demand for these services as showing further structural growth, whilst innovation in software and technology is certainly not standing still - so what's the next big theme?
Hg sees the application of artificial intelligence (AI) having a significant impact on the evolution of the Tax & Accounting universe over the next few years - and we're already seeing continuing development of this technology across the businesses we partner with.
Advanced Automation and AI
As a specialist software and technology investor, Hg is seeing applications of AI filtering into many of the sectors that we operate in. However, despite being well-covered, AI remains ill-defined.
The early AI 'revolution' was epitomised when computer scientists created a programme that could consistently beat a reigning world chess champion in a six-game match - but few people recognise this as AI today. Add into the mix 'Machine Learning', a subset of AI applications which is often used interchangeably with AI, the confusion grows.
We prefer the concept of 'Advanced Automation', especially in relation to the Tax & Accounting universe. For us, this covers the high levels of software automation that we're seeing in this sector, typically enabled by computing techniques from the field of AI.
This is rapidly making its way into core Tax & Accounting applications, resulting in a giant leap in productivity for its users.
Augmentation, not substitution
Despite a proliferation of start-ups and unicorns within this field, we're not seeing many standalone products conquering the space. Instead we're seeing AI applications that augment existing products.
Look at how AI innovation is improving the quality of core applications in other fields of tech, like Google Maps and Gmail, rather than creating new, separate products under an 'AI' brand. Similarly, in a Tax & Accounting context, we do not foresee many new products arising. Rather, we expect a wave of product augmentations to come forth, primarily powered by Advanced Automation.
hgcapital.com/insight/advanced-automation-ai-and-its-application-in-the-world-of-tax-accounting/
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"We believe firms can transform their practice by unlocking client and practice data to deliver advisory-based services, and generate more business opportunities to empower accountants to thrive in the digital accountancy economy."
Elona Mortimer-Zhika, Chief Executive Officer, IRIS Software Group
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"Today, over 200,000 Visma customers are using a product that applies machine learning. All of these products have a common aim - to solve problems faced by our customers."
Jostein Håvaldsrud, R&D Director for Visma Software
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The Development of Advanced Automation
Like the prior evolution in Tax & Accounting software, we expect Advanced Automation to continue to make bookkeepers and accountants more productive at their work: those who do will become the most competitive in their field. Then, as these products strengthen and become part of a core offering, demand will grow - gradually moving from a 'nice-to-have' feature to a 'need-to-have' service from software vendors. We can already see this happening and it will only become more pronounced over the next few years.
As a result, for the vendors of this software, Advanced Automation products and services are likely to become a 'hygiene factor' - they will need to have this offering in order to remain shortlisted by their buyers. It is therefore vital that these businesses are developing this technology now - ahead, rather than behind, the curve - in order to remain competitive.
The future of Advanced Automation
It is said that 'necessity is the mother of invention' and we can certainly see how this applies to AI. The volume of underlying ERP data alone is approximately doubling every 18 months. As this increases, the human ability to process data meaningfully, without proper data processing software tools, is significantly reduced, even for the best accountants and managers.
For Hg, this ever-growing complexity in the audit process, alongside the great strides of innovations we are currently seeing in the market, gives us confidence that there will be a new wave of Advanced Automation developed to meet this demand, drive change and generate material value in millions of businesses globally.
Hg's investment in Tax & Accounting
Hg is a sector expert investor, committed to helping build ambitious businesses across the technology and services market in Europe and the US.
Hg's Team of 120 investment and portfolio management professionals is the largest and most experienced in Europe. These deeply resourced sector teams focus on specific sub-sectors and investment themes to identify companies which have the potential to grow, create employment and become leaders in their space.
Hg made its first investment in the tax and regulatory compliance software market in 2004. Since then, Hg has invested in over 11 platform companies and more than 200 acquisitions - we currently own businesses worth over $10 billion in this sector, including IRIS, Visma and Sovos.
This clustered investment strategy gives us unique insights and experience which benefit the companies we back, their customers and their employees.
AI case studies across the Hg portfolio
Hg is currently partnered with a number of large players in this space and we can see strong progress being made in developing these capabilities. There are three main themes: improving customer productivity, improving customer service and combating accounting errors and/or accountancy fraud.
1 Customer Productivity
Visma, an industry champion in Nordic and Benelux ERP, with >8,500 employees and >900,000 customers, has adopted AI into many of its core products, with the aim of continually reducing costs through further automation of internal processes, whilst also improving the customer experience.
They have c. 200 developers working full time on automation projects, for example, 'Visma Scanner', which reads customer receipts almost instantly, inputting key details into an expense-management system. 'AutoInvoice' is an electronic invoicing tool which currently serves >100,000 users in real time, business-to-government reporting, helping to save 'people-hours' by automating Accounts Payable / Accounts Receivable functions.
TeamSystem is a leading provider of business-critical, regulatory driven software products to c. 250,000 accountants, HR professionals and SMEs in Italy. It is also developing automated scanning and document recognition services for its customers, combining classic optical character recognition (OCR) with modern machine learning practices to create a product with around 75% accuracy which improves day by day - saving significant time for customers and increasing productivity.
Tommaso Cohen, CFO and Strategy Executive Director at TeamSystem, said:
"Our core strategy includes investing heavily in R&D to support the constant improvement and growth of our products and services. A key part of this is technology, which we look to evolve in order to improve the productivity and experience of our customers. Machine learning plays a big role in some of our latest projects and development of this technology is vital to stay competitive in this space."
2 Customer Service
Visma has also built an engine which, with 95% accuracy, can automatically distribute customer support tickets to the correct customer support team, based on message content - saving significant time and therefore better servicing customer enquiries. Third-party chat bots have also been developed to provide customers with further assistance, reducing the need for internal support by around 20%.
TeamSystem have invested in chat bot technology to help improve customer service as well. The service is being developed to improve and learn, supporting TeamSystem's accounting customers, facilitating the exchanging of documents in a safe environment and generally providing additional support.
Jostein Håvaldsrud, R&D Director for Visma Software, said:
"Most software is equal to all users, unless customised. Machine learning is one way of achieving this. It can be used to analyse patterns of usage, then predict the next step of users, and also guide them. At Visma, we're using machine learning heavily in chat-bot services and we are testing out speech-recognition to interact with our software. Machine learning can also be used to eliminate manual work related to input of data. Today, over 200,000 Visma customers are using a product that applies this technology. All of these products have a common aim - to solve problems faced by our customers."
3 Checking for Data Anomalies
IRIS is a leading provider of critical software solutions for Tax & Accounting in the UK, serving more than 20,000 accountancy practices.
In 2018, it launched 'IRIS AI', a family of products and services for its customers. The first product in this offering, 'Ai Auditor™', was developed by MindBridge Ai. It scans the entirety of a client's general ledger for any potential errors using a hybrid of machine learning and AI techniques, vastly improving on legacy/manual spot checks, and is saving SME businesses from administrative errors.
It is also proving effective at checking for fraud, giving accountants a further layer of comfort that no fraudulent behaviour has taken place.
Elona Mortimer-Zhika, CEO at IRIS Software Group, said:
"AI is generating a lot of interest among accounting and finance professionals and there is an appetite to reduce repetitive, time-consuming and redundant tasks to free up capacity for more lucrative, added-value consultancy for clients.
We believe firms can transform their practice by unlocking client and practice data to deliver advisory-based services, and generate more business opportunities to empower accountants to thrive in the digital accountancy economy. Our relationship with MindBridge Ai in bringing Ai Auditor to the UK market is a big stride in this direction."
Year in review
A high quality and focused portfolio of investments delivered a strong year of performance for HGT, driven primarily by robust trading across Hg's unrealised investments.
Top 20 investments:
(92% of the portfolio value)
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+24%
Top 20 LTM sales growth
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+35%
Top 20 LTM EBITDA growth
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On an aggregated basis, the Hg portfolio would represent the fourth largest, and fastest growing, software business in Europe.
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Net asset value (NAV)
During the year, the NAV of HGT increased by £234 million, from £805 million at 31 December 2018 to £1,039 million at 31 December 2019.
Attribution analysis of movements in NAV | Revenue £'000 | Capital £'000 | Total £'000 |
Opening NAV as at 1 January 2019 | 30,554 | 774,433 | 804,987 |
Realised capital and income proceeds from investment portfolio | 1,082 | 24,928 | 26,010 |
Net unrealised capital and income appreciation of investment portfolio | 28,143 | 155,471 | 183,614 |
Net realised and unrealised gains and income from liquid resources | 1,834 | 897 | 2,731 |
Share issue | - | 75,261 | 75,261 |
Dividend paid | (18,444) | - | (18,444) |
Expenditure | (4,043) | (2,621) | (6,664) |
Taxation | (80) | - | (80) |
Investment management costs: |
|
|
|
Priority profit share - current year paid | (10,831) | - | (10,831) |
Priority profit share - reallocation between capital and income | (4,679) | 4,679 | - |
Carried interest - current year paid | - | (1,511) | (1,511) |
Carried interest - current year provision | - | (15,775) | (15,775) |
Closing NAV as at 31 December 2019 | 23,536 | 1,015,762 | 1,039,298 |
Analysis of NAV movements
A number of underlying factors contributed to the increase in NAV. Positive impacts were the £183.6 million revaluation of the unquoted portfolio and uplifts of £26.0 million on the realisation of investments compared with their carrying value at the start of the year. Shares issued during the year contributed a further £75.3 million. Reductions in NAV included: the payment of £18.4 million of dividends to shareholders and Hg's remuneration (£12.3 million and £15.7 million increase in the provision for future carried interest).
Realised and unrealised movements in the value of investments | |
Investment name and ranking by value at 31 December 2019 | £'million |
Visma (1) | 50.4 |
Access (4) | 21.6 |
Sovos Compliance (2) | 19.2 |
IRIS (3) | 18.7 |
Foundry (sold) | 12.5 |
Register (sold) | 11.8 |
P&I (13) | 11.4 |
Other | 9.8 |
Citation (11) | 8.9 |
FE fundinfo (16) | 8.0 |
CogitalGroup (6) | 7.3 |
Litera (7) | 5.6 |
Commify (17) | 5.1 |
Mobility Holding (8) | 5.0 |
Allocate (14) | 5.0 |
TeamSystem (18) | 4.5 |
IT Relation (12) | 4.1 |
A-Plan Group (15) | 3.0 |
Evaluate (23) | 2.2 |
Achilles (24) | (4.5) |
Analysis of movements in the value of investments
During the year, the value of the unrealised investments increased by £183.6 million, before the provision for carried interest. The majority of the increase (£205.5 million) relates to increases from profit growth in the underlying investments and £63.2 million from increased valuation multiples.
Acquisitions net of realisations at carrying value added £25.2 million. An increase in net debt of £58.3 million and £27.4 million of adverse currency movements contributed negatively to the unrealised portfolio.
Top 20 portfolio trading performance as at 31 December 2019
The top 20 investments (representing 92% of total investments by value) have delivered strong sales growth of 24% and EBITDA growth of 35% over the last twelve months ('LTM') the latter being an acceleration from the growth levels reported in December 2018.
The business model characteristics of the companies we are invested in give us confidence that double-digit growth can be achieved consistently going forward.
More than 75% by value of the top 20 businesses within the portfolio are seeing double-digit revenue growth, and more than 85% have delivered double-digit EBITDA growth over the last twelve months.
Profits have grown at a faster rate than revenues with investment made into the cost base of a number of companies, for example, to finance increased sales and marketing capabilities, strengthen management and new product development, continuing to bear fruit.
We have seen very robust and consistent trading performance from the majority of the portfolio with particularly strong growth from P&I, Access, Visma and Commify in the technology sector and from CogitalGroup and Citation in the services sector. Whilst new to the portfolio, Litera, Transporeon and team.blue have had a good start to their partnership with Hg.
Where a company has not performed as well as we would like, we have reflected this in their valuation. During 2019, we took the decision to write down Achilles, whose operational performance had been below expectations; however we believe we can see a path to recovery here.
Overall, continued robust earnings growth and strong cash generation continue to drive equity value in our investments.
Distribution of top 20 LTM sales growth: +24% | |||
Growth rates | LTM Sales | Number of investments within associated band | % of top 20 portfolio by value within associated band |
<0% p.a. | 82 | 1 | 3% |
0% to <10% p.a. | 1,110 | 7 | 20% |
10% to <20% p.a. | 602 | 6 | 32% |
>20% p.a. | 2,191 | 6 | 45% |
Distribution of top 20 LTM profit growth: +35% | |||
Growth rates | LTM EBITDA | Number of investments within associated band | % of top 20 portfolio by value within associated band |
<0% p.a. | 31 | 1 | 3% |
0% to <10% p.a. | 86 | 3 | 9% |
10% to <20% p.a. | 345 | 6 | 32% |
>20% p.a. | 705 | 10 | 56% |
Valuation and net debt analysis as at 31 December 2019
Our valuation policy is applied consistently, in accordance with the IPEV Valuation Guidelines. Each company has been valued individually, based on the trading multiples of comparable businesses and relevant and recent M&A activity; this resulted in an average EBITDA multiple for the top 20 investments of 19.8x (19.5x at 30 June 2019).
There remains a continued shift in the mix of the portfolio to higher growth businesses, in particular in the software sector, where we hold a number of companies with substantial opportunities to grow their Software as a Service ('SaaS') business.
We continue to take a considered approach in determining the level of maintainable earnings to use in each valuation, in line with the IPEV Valuation Guidelines. Most holdings have been valued using the LTM earnings to 30 November 2019, unless we have anticipated that the outlook for the full current financial year is likely to be lower, in which case we have used forecast earnings. The earnings figure used may be adjusted on a pro-forma basis reflecting any acquisitions, disposals or other adjustments to the extent a buyer would make such adjustments. In selecting an appropriate multiple to apply to a company's earnings, we look at a basket of comparable companies, primarily from the quoted sector, but also making use of M&A data. We also use back testing to understand substantive differences that legitimately occur between an exit price and the previous fair value assessment to inform our valuation policy.
Our companies make appropriate use of gearing, with a weighted average net debt for the top 20 of 6.2x LTM EBITDA (6.3x at 30 June 2019). Many of our businesses have highly predictable, strong earnings growth and are very cash generative, enabling us to use debt to reduce their cost of capital and improve returns on the equity we hold.
Distribution of top 20 EV to EBITDA valuation multiples: 19.8x | |||
EV to EBITDA bands | EBITDA £' million | Number of investments within associated band | % of top 20 portfolio by value within associated band |
<15.0x | 260 | 6 | 17% |
15.0x to <18.0x | 103 | 4 | 12% |
18.0x to <21.0x | 221 | 4 | 17% |
21.0x to <24.0x | 523 | 4 | 46% |
>24.0x | 93 | 2 | 8% |
Distribution of top 20 net debt to EBITDA ratios: 6.2x | |||
Debt to EBITDA bands | Debt £' million | Number of investments within associated band | % of top 20 portfolio by value within associated band |
<4.0x | 239 | 2 | 4% |
4.0x to <6.0x | 2,535 | 6 | 40% |
6.0x to <7.0x | 1,803 | 6 | 21% |
7.0x to <8.0x | 1,245 | 4 | 20% |
>8.0x | 1,621 | 2 | 15% |
Outstanding commitments of HGT
At the end of 2019, HGT held liquid resources of £189 million, supported by an undrawn bank facility of £80 million. Outstanding commitments as at 31 December 2019 were £336 million, as listed below. We anticipate that the majority of these outstanding commitments will be drawn down progressively over the next year and are likely to be partly financed by cash flows from future realisations. Future commitments are likely to be drawn down over a period of four to five years (2020 - 2025). Additionally, to mitigate the risk of being unable to fund any draw‑down under its commitments to invest alongside Hg's funds, the Board has negotiated a right to opt out, without penalty, of HGT's obligation to fund such commitments where it does not have the funds to do so or certain other conditions exist.
Fund | Fund | Original commitment £'million | Outstanding commitments as at 31 December 2019 | Outstanding commitments as at 31 December 2018 | ||
£'million | % of NAV | £'million | % of NAV | |||
Hg Genesis 8 | 2018 | 350.0 | 143.5 | 13.8% | 247.9 | 30.8% |
Hg Saturn | 2018 | 150.0 | 69.3 | 6.7% | 92.4 | 11.5% |
Transition Capital | 2018 | 75.0 | 59.1 | 5.7% | 59.5 | 7.4% |
Hg Mercury 2 | 2017 | 80.0 | 36.7 | 3.5% | 49.8 | 6.2% |
Hg Genesis 7 | 2013 | 200.0 | 20.0 | 1.9% | 5.5 | 0.7% |
Hg Mercury 1 | 2011 | 60.0 | 3.3 | 0.3% | 3.2 | 0.4% |
Hg Genesis 6 | 2009 | 285.0 | 2.4 | 0.3% | 3.8 | 0.5% |
Pre-Hg Genesis 6 vintage | pre-2009 | 120.01 | 1.3 | 0.1% | 1.3 | 0.2% |
Asper RPP I | 2006 | 18.32 | 0.6 | 0.1% | 0.7 | - |
Hg6E | 2009 | 15.03 | 0.1 | - | 0.2 | - |
Asper RPP II | 2010 | 33.94 | - | - | 6.5 | 0.8% |
Total |
|
| 336.3 | 32.4% | 470.8 | 58.5% |
Liquid resources5 |
|
| 189.3 | 18.2% | 156.5 | 19.4% |
Net outstanding commitments unfunded by liquid resources |
|
| 147.0 | 14.2% | 314.3 | 39.1% |
1 Excluding any co‑investment participations made through HGT LP. 2 Sterling equivalent of €21.6 million. 3 Partnership interest acquired during 2011. 4 Sterling equivalent of €40.0 million. 5 Excludes undrawn bank standby facility | ||||||
Investment portfolio of HGT
Fund limited partnerships
| Residual cost £'000 | Total valuation1 £'000 | Value % |
Primary buyout funds: |
|
|
|
HGT 7 LP | 98,705 | 269,620 | 32.0% |
HGT 7 LP - Provision for carried interest | - | (43,916) | (5.2%) |
HGT 8 LP | 185,066 | 233,140 | 27.6% |
HGT LP | 76,401 | 146,191 | 17.4% |
HGT Saturn LP | 78,678 | 120,892 | 14.4% |
HgCapital Mercury D LP | 17,335 | 45,314 | 5.4% |
HgCapital Mercury D LP - Provision for carried interest | - | (9,110) | (1.1%) |
HGT Mercury 2 LP | 26,076 | 41,560 | 4.9% |
HGT 6 LP | 14,861 | 24,099 | 2.9% |
HGT 6 LP - Provision for carried interest | - | (4,818) | (0.6%) |
Total primary buyout funds | 497,122 | 822,972 | 97.7% |
Secondary buyout funds: |
|
|
|
HgCapital 6 E LP | - | 1,215 | 0.1% |
HgCapital 6 E LP - Provision for carried interest | - | (243) | - |
Total secondary buyout funds | - | 972 | 0.1% |
Total buyout funds | 497,122 | 823,944 | 97.8% |
Transition capital funds: |
|
|
|
HGT Transition Capital LP | 14,852 | 16,527 | 2.0% |
Total transition capital funds | 14,852 | 16,527 | 2.0% |
Renewable energy fund: |
|
|
|
Asper RPP I | 5,040 | 1,808 | 0.2% |
Total investments net of carried interest provision | 517,014 | 842,279 | 100.0% |
1 Includes accrued income.
Portfolio diversification and performance
Hg cluster by value
49% Tax & Accounting
15% ERP & Payroll
12% Legal & Regulatory
8% SME Tech & Services
6% Healthcare IT
6% Automotive
2% Insurance
2% Capital Markets & Wealth Management IT
Geographic spread by value
31% UK
28% Scandinavia
18% North America
15% Germany
8% Other Europe
Investment vintage by value
13% 2019
28% 2018
9% 2017
20% 2016
3% 2015
27% pre 2015
Analysis by value of investment return relative to its original cost2
97% Above
3% Below
2Representing aggregate realised proceeds and unrealised valuations of an investment
Investments and realisations
Investments 2019
Over the course of the year, Hg invested a total of £1.4 billion on behalf of its clients, with HGT's share being £117 million.
The vast majority of our investments are generated by establishing and developing relationships with companies over the longer term and typically pursuing opportunities where we have a strong relationship with a founder or management team. By doing this, we believe that we can invest in the very best businesses within our chosen clusters.
We continue to look for businesses that share similar underlying business model characteristics, such as: high levels of recurring revenues; a product or service that is business-critical but typically low spend; low customer concentration; and low sensitivity to market cycles. This is a theme that runs through many of our new investments and we believe companies with these characteristics will remain in high demand across market cycles.
New investments
Transporeon
£42m invested on behalf of HGT, including £6m in co-investment
In March, Hg completed an investment in Transporeon Group ('Transporeon'), one of the world's leading cloud‑based logistics platforms, via the Hg Genesis 8 Fund.
Founded in 2000 and headquartered in Ulm, Germany, Transporeon connects a global network of over 1,200 shippers and >90,000 carriers, enabling them to source, communicate, collaborate and transact more efficiently, whilst also helping to lower CO2 emissions by reducing empty back-haul journeys. This investment represents another example of Hg's focus on Cloud‑based software and network companies, providing SaaS solutions to the business community.
Litera
£34m invested on behalf of HGT
In May, Hg completed an investment in Litera. Based in Chicago, New York and London, Litera provides a leading suite of legal document productivity applications, delivered as an end-to-end platform to more than 1,300 organisations across the globe.
This investment follows one of Hg's core investment theses, focused on the secular growth of software suppliers for business-critical functions in the legal and regulatory compliance sector. Hg has been actively following this theme for over 15 years, with Litera representing the sixth legal and compliance business currently in Hg's portfolio.
Hg's team has known Litera for several years, recognising it as a business that solves mission-critical workflows for its customers, leading to strong recurring revenues and displaying the same growth characteristics as many others in the Hg portfolio.
team.blue
£25m invested on behalf of HGT
In March, Hg completed an investment in Combell Group, a mass hosting provider offering web enablement solutions focused mainly on the Belgium and Danish markets with a smaller presence in the Netherlands, via the Hg Genesis 8 Fund, before supporting the transformational acquisition of TransIP Group in June 2019, also focused on the Netherlands. Finally, in September 2019, Register Group was acquired (a Mercury 2 portfolio company) - focused on growth markets in Southern Europe, Italy and Spain, as well the UK and Ireland. Following these acquisitions, the combined group rebranded as team.blue.
team.blue is a leading European provider of mass hosting services to SMEs, primarily in North-Western Europe (Netherlands, Belgium, Denmark, Ireland and UK) and Southern Europe (Italy and Portugal) with a growing presence in Sweden, Switzerland and Spain. The business has close to two million SME and small office/home office customers and is a one-stop partner for web hosting, domains, e-commerce and application solutions.
Further investments
Visma
£19m invested on behalf of HGT
In May and October, Hg made further investments in Visma, a leading provider of mission‑critical business software to SMEs in the Scandinavian region via the Hg Saturn Fund. In 2002, Hg identified regulatory‑driven, subscription‑based software as an attractive sub‑sector with scope for considerable growth over the following decade and initially invested in Visma in 2006. Since this time the business has consistently exceeded our investment plans, having acquired more than 150 companies over our ownership period to become one of today's leading and largest SaaS companies in Europe, with more than £1 billion in cloud revenues.
Lyniate
£4m invested on behalf of HGT
In June and September, the Hg Mercury 2 Fund made further bolt-on investments in Lyniate. Headquartered in Boston, USA, Lyniate is a global leader in healthcare interoperability and data liquidity solutions. Their software serves public and private hospitals, health systems, Health Information Exchanges, OEM vendors, public health departments and federal government organisations.
New investment since the year-end
P&I
An estimated £35m invested on behalf of HGT including £5m in co-investment
In December 2019, Hg announced an investment in Personal & Informatik AG ('P&I'), a leading provider of cloud-based HR software, headquartered in Germany. This acquisition, via the Hg Saturn fund, valued the business at an enterprise value of €2 billion. The seller, Permira, will remain invested in P&I with a substantial minority stake. This transaction is due to complete in March 2020.
Argus
£35m invested on behalf of HGT including £4m in co-investment
In January 2020, Hg completed an investment in Argus Media ('Argus'), a leading global provider of energy and commodity price reporting via the Hg Saturn Fund.
Founded in 1970, Argus is an independent media organisation headquartered in London. Companies in 140 countries around the world use Argus data to index physical trade and as benchmarks in financial derivative markets as well as for analysis and planning purposes.
Interlad
£31m invested on behalf of HGT
In February 2020, Hg completed an investment in Intelerad Medical Systems ('Intelerad'), a leading global provider of medical imaging software and enterprise workflow solutions, via the Hg Genesis 8 Fund.
Founded in 1999, Intelerad specialises in diagnostic viewing, reporting and collaboration solutions for radiologists. Headquartered in Montreal, the business has over 400 employees located in offices in Canada, the US, the UK, and Australia. The company serves over 300 healthcare organisations around the world, including radiology groups, imaging centres, clinics and reading groups with a strong and growing presence in hospital imaging departments. Healthcare IT is a core sector for Hg, with an investment focus on healthcare operations, core systems, life sciences digitisation, interoperability and population health. Intelerad represents the 5th healthcare technology investment in Hg's current portfolio.
smartTrade
An estimated £17.5m invested on behalf of HGT including £10m in co-investment
In February 2020, Hg announced an investment in smartTrade Technologies ('smartTrade'), a leader in multi-asset electronic trading solutions, via the Hg Mercury 2 fund. The transaction is due to complete in March 2020.
Headquartered in France, smartTrade is a managed services and hosted software provider for trading desks, enabling its global client base of financial institutions to develop and run high-performance trading platforms throughout the world. Hg has been investing in Capital Markets & Wealth and Asset Management technology for almost 20 years and has known the smartTrade team since 2015. During this time Hg has recognised smartTrade as a truly innovative business with an exceptional leadership team, which has developed leading, modular solutions, used by sell-side and buy-side market participants.
With continued potential for growth, smartTrade is a compelling fit with Hg's expertise and capabilities.
Further investment since the year-end
Achilles
£10m invested on behalf of HGT
In January 2020, HGT made a further investment in Achilles, structured as a debt instrument via the Transition Capital Fund. This will be used to implement the roll-out of new technology which will complete the migration of the business onto a new platform "my.Achilles"
Further detail on investments as at 31 December 2019 can be found on pages 54 to 75 in the full Annual Report and Accounts.
Realisations 2019
Over the course of the year, Hg has returned a total of £843 million to its clients, including £117 million to HGT.
Whilst exits over 2019 were slower in pace than over the very active prior two years, we have continued to look at opportunities to realise proceeds for our investors.
We have also taken advantage of buoyant debt markets during the period by refinancing investments where we have good visibility of their future earnings, returning cash proceeds to our clients, including HGT, and we will continue to assess further opportunities.
Exits
Foundry
£28m returned to HGT
In April, Hg completed the sale of Foundry, a UK headquartered leading global developer of high-end visual effects ('VFX') and 3D design software, to Roper Technologies Inc., a leading diversified technology company. Hg invested in Foundry from the Hg Genesis 7 fund in 2015, recognising the company as a leading global provider of vertical market application software, with rich intellectual property, strong positioning within its business segments and with the potential to enter new market segments. Over the course of the investment, Hg worked with the company's management team to broaden Foundry's go-to-market strategy, invest in its cutting-edge Media & Entertainment product offering and accelerate the growth of the company's Digital Design division.
The sale of Foundry delivered a 2.1x investment multiple and a 22% gross IRR over the investment period. This transaction resulted in an uplift of 79% over the carrying value of the business at 31 December 2018.
Register
£17m returned to HGT
In September, team.blue (formerly Combell Group), a leading mass hosting business in Belgium and Denmark, announced the acquisition of Register (formerly DADA), a pan-European mass hosting company headquartered in Italy. team.blue is the third largest shared hosting business in Europe with more than 2 million customers across 10 countries. HGT was already invested in team.blue; its investment in team.blue increased as a result of this transaction and was valued at £31 in total at year-end.
Partial exits
Asper
£11m returned to HGT
In September, HGT agreed the sale of the Asper RPP II Fund interest to two strategic buyers, as part of a wider secondary sale process. Additional consideration is deferred and due to HGT on the first anniversary of the sale.
Raet
£10m returned to HGT
As reported in the 2018 full year accounts, last year Hg agreed to the sale of Raet's operations to Visma. During the year, £10.3 million of deferred proceeds were received in respect of this investment.
Visma
£3m returned to HGT
In February, Hg completed the part‑realisation of Visma, a leading provider of business‑critical software to private and public enterprises in the Scandinavian region, from the Hg Genesis 7 Fund, to the Canada Pension Plan Investment Board (CPPIB). Following completion of this transaction,
Hg will remain the lead investor in Visma alongside some of the world's largest institutional investors. Together, Visma and its strong investor base will continue to reinforce Visma's position as a leading SaaS business in Europe and one of the world's most successful SaaS companies.
Refinancings
A-Plan Group
£14m returned to HGT
In March, the Genesis team will complete the refinancing of A‑Plan Group, a leading independent high‑street insurance broker in the UK. A‑Plan Group has now returned 1.4x the original investment made in April 2015 to the Hg Genesis 7 Fund.
Commify
£9m returned to HGT
In September, the Mercury team completed the refinancing of Commify, a leading Application-to-Person messaging service in Western Europe.
FE fundinfo
£6m returned to HGT
In December, the Hg Mercury team completed the refinancing of FE fundinfo, the global fund data and analytics business, catering to asset managers and fund distributors.
team.blue
£5m returned to HGT
In June, team.blue (formerly Combell Group), a mass hosting provider offering web enablement solutions to SMEs across Europe, headquartered in Belgium, merged with TransIP, a leading hosting and Virtual Private Server ('VPS') provider based in the Netherlands. Subsequently, Hg completed a refinancing of the enlarged business, repaying a portion of Hg's original loan notes.
Sovos Compliance
£2m returned to HGT
In April, Hg completed the refinancing of Sovos, a leading global provider of tax compliance software solutions in Hg Genesis 7. This was driven by strong trading performance, which has seen Sovos deliver robust double-digit compound growth in revenue and EBITDA since acquisition.
EidosMedia
£1m returned to HGT
In September, the Hg Genesis team completed the refinancing of EidosMedia, a leader in Enterprise Content Management software serving media and Financial Services markets.
Exit since the year end
e-conomic
£2m returned to HGT
In January 2020, Hg realised its residual holding in e-conomic, a leading European Software as a Service ('SaaS') accounting solutions provider to SMEs based in Denmark.
Further detail on investments as at 31 December 2019 can be found on pages 54 to 75 in the full Annual Report and Accounts.
To view our press releases, please visit hgcapitaltrust.com/news-and-media/press-releases/pr-2019.aspx
Summary of investment and realisation activity
Investments made during the year
Company
| Cluster
| Location
| Activity
| Cost £'000 |
Transporeon | ERP & Payroll | Germany | Cloud-based logistics platform | 42,377 |
Litera | Legal & Regulatory Compliance | North America | Provider of legal document applications | 34,242 |
team.blue | SME Tech & Services | Benelux | European hosting services for SMEs | 24,814 |
New investments |
|
|
| 101,433 |
Visma | Tax & Accountancy/ERP & Payroll | Scandinavia | Provider of business software to SMEs | 18,998 |
Lyniate | Healthcare IT | North America | Software to the healthcare sector | 3,839 |
Other |
|
|
| (6,986)1 |
Further investments |
|
| 15,851 | |
Total investments on behalf of HGT |
|
| 117,284 | |
1 Figure is negative due to a refinancing which is accounted for as a reduction of original cost if completed with 18 months of original acquisition. | ||||
Realisations made during the year
Company
| Sector
| Exit route
| Proceeds2 £'000 | |
Foundry | SME Tech & Services | Trade sale | 28,227 | |
Asper RPP II | Renewables | Secondary sale | 19,745 | |
Register | SME Tech & Services | Trade sale | 16,518 | |
Full realisations |
|
| 64,490 | |
A‑Plan Group | Insurance | Refinancing | 13,615 | |
Raet | ERP & Payroll | Secondary sale | 10,307 | |
Commify | SME Tech & Services | Refinancing | 9,185 | |
FE fundinfo | Capital Markets & Wealth Management IT | Refinancing | 5,596 | |
team.blue | SME Tech & Services | Partial sale | 5,374 | |
Other |
|
| 9,481 | |
Partial realisations |
|
| 53,558 | |
Total proceeds from realisations |
|
| 118,048 | |
Carried interest paid to the Manager |
|
| (1,511) | |
Total proceeds from realisations received by HGT |
|
| 116,537 | |
2 Includes gross revenue received during the year ended 31 December 2019. | ||||
Hg's outlook
______________________________________________________________________________________________________
"In 2019, we have reinforced Hg's focus and scale. Focus on the software and service universe and scale to ensure our reach, expertise and network goes broader and deeper than ever before.
Today Hg looks less like a traditional private equity firm and more like a fully collaborative, software and services organisation. This is our vision for the future of private equity."
Matthew Brockman, Managing Partner, Hg
______________________________________________________________________________________________________
Investments
We believe that the clarity and distinctive focus of our strategy as a disciplined investor provides us with several clear advantages, especially in the current high asset price market environment. Specifically, we continue to concentrate on companies that provide non‑discretionary, business‑ critical products or services, to fragmented customer bases, and which benefit from strong contracted or recurring revenues. This focus on defensive growth should enable us to identify opportunities that will generate strong, risk adjusted returns for our clients across market cycles.
We continue to see attractive investment opportunities in our eight target 'clusters', and we continue to invest selectively, capitalising on situations where we have a specific angle and have built many years of knowledge of the business and its end-market clusters, and developed strong relationships with the founders and management teams.
Hg's clear investment focus, combined with our scale, large investment team reach and network, produces more investment opportunities than Hg would want to complete in any given year. This means we are able to be highly discerning in the opportunities we pursue. In 2019, just within our 8 target clusters, Hg declined over 30 investment opportunities, while we made three new platform investments; a further 25 situations remained under review at the year end.
Across our fund stack we expect investment activity in 2020 to continue broadly in line with our recent historic pacing. In 2020 we have already announced or closed investments in Argus Media, P&I, Intelerad and smartTrade for the Saturn, Genesis and Mercury funds.
As ever, bolt-ons and strategic M&A within the current portfolio remain a key focus and across the current portfolio we have multiple live M&A situations; MediFox, Access, Visma, Mitratech, Sovos, and IT Relation have already signed meaningful bolt-ons in 2020.
Realisations
Over 2020 we will continue to focus on opportunities to crystallise value across our portfolio, and return money to our clients, including HGT. We have several exit and refinancing processes currently underway or specifically planned for 2020 and we believe these will help drive the continued positive performance of HGT.
Current risks
The Covid-19 situation continues to worsen. At this stage, we expect the Coronavirus to have limited direct impact on Hg's portfolio, given the defensive growth characteristics of the portfolio, with a strong focus on protected business models selling business-critical and non-discretionary software and services to their underlying customers.
In the case of a significant spread of the virus to Europe, again, we expect the direct impact on our businesses to be limited versus other sectors (particularly consumer discretionary or travel related) given the underlying nature of our long-term subscription-revenue based B2B software platforms, although general business sentiment will no doubt be affected. We will continue to keep this situation under close review.
It seems highly likely that spread of Covid-19 will now lead to meaningfully lower global growth in 2020, and potentially a global recession. Given we are now 12 years into one of the longest sustained periods of global growth on record, we have been anticipating a recessionary environment for the last few years. We believe our current investments are well positioned to continue to create value on both an absolute and relative basis going forward, even if macro-economic conditions deteriorate.
Whilst we are yet to see how the new relationship between the UK and European Union will develop, we remain confident that the types of businesses in which we invest will continue to perform well.
Long-term prospects
At Hg, we have never seen more opportunity to back great software and tech-enabled service companies that are changing how we all do business.
We continue to see the impact of positive trends driving technology growth for the next 10 to 20 years, including:
• the automation of routine tasks; Software used to save time and improve accuracy in business processes;
• the rise of software interconnectivity; through the use of application program interfaces ('APIs') that let software talk to software, thereby exponentially increasing the amount of usable data available for businesses; and
• increased desire from governments for regulatory visibility on businesses (and citizens); in almost all B2B software there are compliance and government tailwinds.
We believe our investment strategy works. The portfolio is in good health overall and growing strongly. Trading over the last twelve months has continued to generate average double-digit sales and EBITDA growth of 24% and 35% respectively, across the top 20 businesses, and margins of 29%. This should create a store of future value for the shareholders of HGT.
Overview of the underlying investments
held through HGT's limited partnerships
Investments |
Fund |
Cluster |
Location | Year of investment | Residual cost £'000 | Total Valuation1 £'000 |
Value | Cum. value % | |
1 | Visma | HGT 7/HGT/HGT Saturn | Tax & Accountancy/ERP & Payroll | Scandinavia | 2014 | 88,903 | 223,326 | 24.8 | 24.8 |
2 | Sovos Compliance | HGT 7/HGT | Tax & Accountancy | N. America | 2016 | 26,177 | 89,546 | 9.9 | 34.7 |
3 | IRIS | HGT Saturn | Tax & Accountancy/ERP & Payroll | UK | 2018 | 36,380 | 64,047 | 7.1 | 41.8 |
4 | Access | HGT 8 | ERP & Payroll | UK | 2018 | 30,491 | 56,949 | 6.3 | 48.1 |
5 | Transporeon | HGT 8/HGT | ERP & Payroll | Germany | 2019 | 42,377 | 42,689 | 4.7 | 52.8 |
6 | CogitalGroup | HGT 7/HGT | Tax & Accountancy | UK | 2016 | 20,966 | 40,434 | 4.5 | 57.3 |
7 | Litera | HGT 8 | Legal & Regulatory Compliance | N. America | 2019 | 34,242 | 39,887 | 4.4 | 61.7 |
8 | Mobility Holding | HGT 8 | Automotive | Germany | 2017 | 33,967 | 39,478 | 4.4 | 66.1 |
9 | team.blue | HGT 8/Mercury 2 | SME Tech & Services | Benelux | 2019 | 20,069 | 31,141 | 3.5 | 69.6 |
10 | Mitratech | HGT 7/HGT | Legal & Regulatory Compliance | N. America | 2017 | 22,258 | 23,640 | 2.6 | 72.2 |
11 | Citation | HGT 7 | Legal & Regulatory Compliance | UK | 2016 | 7,904 | 20,419 | 2.3 | 74.5 |
12 | IT Relation | HGT 8 | SME Tech & Services | Scandinavia | 2018 | 16,037 | 20,121 | 2.2 | 76.7 |
13 | P&I | HGT 7/HGT | ERP & Payroll | Germany | 2013 | 1,796 | 19,906 | 2.2 | 78.9 |
14 | Allocate | HGT 8 | Healthcare IT | UK | 2018 | 13,959 | 19,177 | 2.1 | 81.0 |
15 | A‑Plan Group | HGT 7 | Insurance | UK | 2015 | 1,697 | 18,876 | 2.1 | 83.1 |
16 | FE fundinfo | Mercury/Mercury 2 | Capital Markets & Wealth Mgmt IT | UK | 2018 | 6,687 | 18,059 | 2.0 | 85.1 |
17 | Commify | Mercury/HGT | SME Tech & Services | UK | 2017 | 4,080 | 17,969 | 2.0 | 87.1 |
18 | TeamSystem | HGT 6 | Tax & Accountancy/ERP & Payroll | Italy | 2010 | 144 | 16,750 | 1.9 | 89.0 |
19 | BrightPay | Transition Capital | ERP & Payroll | Ireland | 2018 | 14,852 | 15,407 | 1.7 | 90.7 |
20 | MediFox DAN-Group | Mercury 2/HGT | Healthcare IT | Germany | 2018 | 11,832 | 14,235 | 1.6 | 92.3 |
21 | Lyniate | Mercury 2 | Healthcare IT | N. America | 2018 | 10,528 | 10,002 | 1.1 | 93.4 |
22 | STP | Mercury | Legal & Regulatory Compliance | Germany | 2016 | 4,260 | 7,970 | 0.9 | 94.3 |
23 | Evaluate | Mercury | Healthcare IT | UK | 2016 | 3,745 | 7,670 | 0.9 | 95.2 |
24 | Achilles | HGT | Legal & Regulatory Compliance | UK | 2008 | 17,298 | 7,339 | 0.8 | 96.0 |
25 | Eucon | Mercury | Automotive/Insurance | Germany | 2015 | 4,658 | 6,650 | 0.7 | 96.7 |
26 | Noventic | HGT 6 | Other | Germany | 2012 | 922 | 4,781 | 0.5 | 97.2 |
27 | EidosMedia | HGT 7 | SME Tech & Services | Italy | 2015 | 7,467 | 4,444 | 0.5 | 97.7 |
28 | Trace One | Mercury | Legal & Regulatory Compliance | France | 2016 | 493 | 3,737 | 0.4 | 98.1 |
29 | Project Delta | Mercury 2 | Other | Other Europe | 2019 | 3,214 | 3,328 | 0.4 | 98.5 |
30 | e-conomic | HGT 6 | Tax & Accountancy | Scandinavia | 2013 | - | 2,319 | 0.3 | 98.8 |
31 | Gentrack | HGT 7 | Other | New Zealand | 2017 | 2,069 | 1,508 | 0.2 | 99.0 |
| Non‑active investments (5) |
|
|
| 22,502 | 678 | 0.1 | 99.1 | |
| Total buyout investments (36) |
|
|
| 511,974 | 892,482 | 99.1 |
| |
| Currency hedges | Various | Forward sale of US$ and € | - | 4,861 | 0.5 | 99.6 | ||
| Renewable energy | Asper RPP I | Renewable energy | 5,040 | 1,808 | 0.2 | 99.8 | ||
| Secondary fund interests | Hg 6E | Secondary fund interests | - | 1,215 | 0.2 | 100.0 | ||
| Total all investments |
|
|
|
| 517,014 | 900,366 | 100.0 |
|
1 Including accrued income but before the provision for carried interest of £58,087,000.
Non-Statutory Accounts
The financial information set out below does not constitute the Company's statutory accounts for the years ended 31 December 2018 and 2019 but is derived from those accounts. Statutory accounts for 2018 have been delivered to the Registrar of Companies, and those for 2019 will be delivered in due course. The Auditors have reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the Auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditors' report can be found in the Company's full Annual Report and Accounts at www.hgcapitaltrust.com
Financial statements
Income statement for the year ended 31 December 2019 | |||||||
| Notes | Revenue return | Capital return | Total return | |||
2019 £'000 | 2018 £'000 | 2019 £'000 | 2018 £'000 | 2019 £'000 | 2018 £'000 | ||
Gains on investments and liquidity funds | 13 | - | - | 161,389 | 93,792 | 161,389 | 93,792 |
Gains/(losses) on priority profit share loans | 5(b) | - | - | 4,679 | (6,325) | 4,679 | (6,325) |
Net income | 4 | 15,549 | 17,128 | - | - | 15,549 | 17,128 |
Other expenses | 6(a) | (3,288) | (2,468) | - | - | (3,288) | (2,468) |
Net return before finance costs and taxation |
| 12,261 | 14,660 | 166,068 | 87,467 | 178,329 | 102,127 |
Finance costs | 6(b) | (755) | (753) | - | - | (755) | (753) |
Net return before taxation |
| 11,506 | 13,907 | 166,068 | 87,467 | 177,574 | 101,374 |
Taxation | 9(a) | (80) | (242) | - | - | (80) | (242) |
Net return after taxation attributable to reserves |
| 11,426 | 13,665 | 166,068 | 87,467 | 177,494 | 101,132 |
|
|
|
|
|
|
|
|
Return per Ordinary share* | 10(a) | 2.94p | 3.66p | 42.77p | 23.43p | 45.71p | 27.09p |
*All per share workings have been restated for the ten for one share split in May 2019.
The total return column of this statement represents HGT's income statement. The supplementary revenue and capital return columns are both prepared under guidance published by the Association of Investment Companies ('AIC'). All recognised gains and losses are disclosed in the revenue and capital columns of the income statement and as a consequence, no statement of comprehensive income has been presented. The movements in reserves are set out in Note 21 to the financial statements. All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year.
The following Notes form part of these financial statements. | |||||||
Balance sheet as at 31 December 2019 | |||
| Notes | 2019 £'000 | 2018 £'000 |
Fixed asset investments |
|
|
|
Investments at fair value through profit or loss: |
|
|
|
Unquoted investments | 12 | 788,013 | 609,663 |
Total fixed asset investments |
| 788,013 | 609,663 |
Current assets - amounts receivable after one year: |
|
|
|
Accrued income on fixed assets | 14 | 54,266 | 39,531 |
Current assets - amounts receivable within one year: |
|
|
|
Debtors | 14 | 8,961 | 154 |
Investments at fair value through profit or loss: |
|
|
|
Liquidity funds | 15 | 184,505 | 152,920 |
Uninvested capital in limited partnerships |
| 226 | 169 |
Cash at bank | 16 | 4,558 | 3,436 |
Total current assets |
| 252,516 | 196,210 |
Creditors - amounts falling due within one year | 17 | (1,231) | (886) |
Net current assets |
| 251,285 | 195,324 |
Net assets |
| 1,039,298 | 804,987 |
Capital and reserves: |
|
|
|
Called up share capital | 20 | 10,186 | 9,331 |
Share premium account | 21 | 194,774 | 120,368 |
Capital redemption reserve | 21 | 1,248 | 1,248 |
Capital reserve - unrealised | 21 | 264,953 | 119,958 |
Capital reserve - realised | 21 | 544,601 | 523,528 |
Revenue reserve | 21 | 23,536 | 30,554 |
Total equity shareholders' funds |
| 1,039,298 | 804,987 |
Net asset value per Ordinary share* | 10(b) | 255.1p | 215.7p |
Ordinary shares in issue at 31 December |
| 407,424,808 | 37,324,698 |
*All per share workings have been restated for the ten for one share split in May 2019.
The financial statements of HgCapital Trust plc (registered number 01525583) above (or on pages 77 to 100 in the full Annual Report and Accounts) were approved and authorised for issue by the Board of Directors on 6 March 2020 and signed on its behalf by: Roger Mountford, Chairman Richard Brooman, Director
The following Notes form part of these financial statements. | |||
Statement of cash flows for the year ended 31 December 2019 | |||
| Notes | 2019 £'000 | 2018 £'000 |
Net cash outflow from operating activities | 7 | (4,657) | (17,850) |
Investing activities: |
|
|
|
Purchase of fixed asset investments | 12 | (117,284) | (187,338) |
Proceeds from the sale of fixed asset investments |
| 96,621 | 218,925 |
Purchase of liquidity funds | 15 | (90,000) | (222,882) |
Redemption of liquidity funds | 15 | 61,100 | 226,578 |
Net cash (outflow)/inflow from investing activities |
| (49,563) | 35,283 |
Financing activities: |
|
|
|
Servicing of finance |
| (1,475) | (753) |
Equity dividends paid | 11 | (18,444) | (17,169) |
Proceeds from issue of shares |
| 75,261 | - |
Net cash inflow/(outflow) from financing activities |
| 55,342 | (17,922) |
|
|
|
|
Increase/(decrease) in cash and cash equivalents in the year | 16 | 1,122 | (489) |
Cash and cash equivalents at 1 January | 16 | 3,436 | 3,925 |
Cash and cash equivalents at 31 December | 16 | 4,558 | 3,436 |
The following Notes form part of these financial statements. | |||
Statement of changes in equity for the year ended 31 December 2019 | ||||||||
|
| Non-distributable | Distributable |
| ||||
| Notes
| Share capital £'000 | Share premium account £'000 | Capital redemption reserve £'000 | Capital reserve - £'000 | Capital £'000 | Revenue reserve £'000 | Total £'000 |
At 31 December 2018 |
| 9,331 | 120,368 | 1,248 | 119,958 | 523,528 | 30,554 | 804,987 |
Net return after taxation |
| - | - | - | 144,995 | 21,073 | 11,426 | 177,494 |
Contributions of equity |
| 855 | 74,406 | - | - | - | - | 75,261 |
Equity dividends paid | 11 | - | - | - | - | - | (18,444) | (18,444) |
At 31 December 2019 | 20, 21 | 10,186 | 194,774 | 1,248 | 264,953 | 544,601 | 23,536 | 1,039,298 |
At 31 December 2017 |
| 9,331 | 120,368 | 1,248 | 79,256 | 476,763 | 34,058 | 721,024 |
Net return after taxation |
| - | - | - | 40,702 | 46,765 | 13,665 | 101,132 |
Equity dividends paid | 11 | - | - | - | - | - | (17,169) | (17,169) |
At 31 December 2018 | 20, 21 | 9,331 | 120,368 | 1,248 | 119,958 | 523,528 | 30,554 | 804,987 |
The following Notes form part of these financial statements. | ||||||||
Notes to the financial statements
1. Principal activity
The principal activity of HGT is investment. HGT is an investment company as defined by Section 833 of the Companies Act 2006 and an investment trust under Sections 1158 and 1159 of the Corporation Tax Act 2010 ('CTA 2010'), and is registered as a public company in England and Wales under number 01525583 with its registered office at 2 More London Riverside, London SE1 2AP.
2. Basis of preparation
The financial statements have been prepared under the historical cost convention, except for the revaluation of financial instruments at fair value as permitted by the Companies Act 2006, and in accordance with applicable UK law and UK Accounting Standards ('UK GAAP'), including Financial Reporting Standard 102 - 'The Financial Reporting Standard applicable in the United Kingdom and Republic of Ireland' ('FRS 102') and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' ('SORP'), issued in October 2019. All of HGT's operations are of a continuing nature.
HGT has considerable financial resources and, as a consequence, the Directors believe that HGT is well placed to manage its business risks. After making enquiries, the Directors have a reasonable expectation that HGT will have adequate resources to continue in operational existence for the next twelve-month period from the date of approval of this Report.
Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts. See above (or page 15 in the full Annual Report and Accounts) for the Directors' commentary on going concern.
The same accounting policies, presentation and methods of computation are followed in these financial statements as applied in HGT's previous annual audited report and accounts.
3. Organisational structure and accounting policies
Partnerships where HGT is the sole limited partner
HGT entered into eight separate partnership agreements with general and founder partners in May 2003 (subsequently revised in January 2009), January 2009, July 2011, March 2013, December 2016, February 2017, January 2018 and February 2018; at each point an investment holding limited partnership was established to carry on the business of an investor, with HGT being the sole limited partner in these entities.
The purpose of these partnerships, HGT LP, HGT 6 LP, HGT 7 LP, HGT 8 LP, HgCapital Mercury D LP, HGT Mercury 2 LP, HGT Saturn LP and HGT Transition Capital LP, (together the 'primary buyout funds') is to hold all HGT's investments in primary buyouts. Under the partnership agreements, HGT made capital commitments into the primary buyout funds, with the result that HGT now holds direct investments in the primary buyout funds and an indirect investment in the fixed asset investments that are held by these funds, as it is the sole limited partner. These direct investments are included under fixed asset investments on the balance sheet and in the table of investments on page 45 in the full Annual Report and Accounts. The underlying investments that are held indirectly are included in the overview of investments on page 52 in the full Annual Report and Accounts.
Consolidated financial statements have not been prepared because HGT does not have control over the operating and financial activities of the underlying investment holding limited partnerships, as the general partners are responsible for the management of their activities.
Partnerships where HGT is a minority limited partner
In July 2011, HGT acquired a direct secondary investment in HgCapital 6 E LP ('Hg 6E LP'), one of the partnerships that comprise the Hg 6 Fund, in which HGT is now a limited partner pari passu with other limited partners. This is a direct investment in the Hg 6E LP Fund, as shown on the balance sheet and in the table of investments on page 45.
HGT also entered into partnership agreements with other limited partners with the purpose of investing in renewable energy projects by making capital commitments in Asper Renewable Power Partners LP ('Asper RPP I LP') and Asper Renewable Power Partners 2 C LP ('Asper RPP II LP') (together the 'renewable funds'). These are direct investments in the renewable funds, as shown on the balance sheet and in the table of investments on page 45 in the full Annual Report and Accounts.
Priority profit share and other operating expenses, payable by partnerships in which HGT is a minority limited partner, are recognised as unrealised losses in the capital return section of the income statement and are not separately disclosed within other expenses.
Priority profit share and carried interest under the primary buyout limited partnership agreements
Under the terms of the primary buyout fund limited partnership agreements ('LPAs'), each general partner (see Note 5) is entitled to appropriate, as a first charge on the net income of the funds, an amount equivalent to its priority profit share ('PPS'). HGT is entitled to net income from the funds, after payment of the PPS.
In years in which these funds have not yet earned sufficient net income to satisfy the PPS, the entitlement is carried forward to the following years. The PPS is payable quarterly in advance, even if insufficient net income has been earned. Where the cash amount paid exceeds the net income, an interest free loan is advanced to the general partner by these primary buyout funds, which is funded via a loan from HGT. Such loan is only recoverable from the general partner by an appropriation of net income; until net income is earned, no value is attributed to this loan (see Note 5(b)).
Furthermore, under the primary buyout funds' LPAs, each founder partner (see Note 5(c)) is entitled to a carried interest distribution once certain preferred returns are met. The LPAs stipulate that the primary buyout funds' capital gains or net income, after payment of the carried interest, are allocated to HGT, when the right to these returns is established.
Accordingly, HGT's entitlement to net income and net capital gains is shown in the appropriate lines of the income statement. Notes 4, 5 and 12 to the financial statements disclose the gross income and gross capital gains of the primary buyout funds and also reflect the proportion of net income and capital gains in the buyout funds that have been paid to the general partner as its PPS and to the founder partner as carried interest, where applicable.
The PPS paid from net income is charged to the revenue account in the income statement, whereas PPS paid as an interest‑free loan, if any, is charged as an unrealised depreciation to the capital return on the income statement.
The carried interest payments made from net income and capital gains are charged to the revenue and capital account respectively on the income statement.
Investment income and interest receivable
As stated above, all income that is recognised by the primary buyout funds, net of PPS, is allocated to HGT and recognised when the right to this income is established. Income from Hg 6 E LP and the renewable energy funds would normally consist of income distributions and these distributions are recognised as income in the financial statements of HGT when the right to such distribution is established.
The accounting policies below apply to the recognition of income by the primary buyout funds, prior to allocation between the Partners:
Interest income on non‑equity shares and fixed income securities is recognised on a time apportionment basis so as to reflect the effective yield when it is probable that it will be realised. Dividends receivable on unlisted equity shares where there is no ex‑dividend date and on non‑equity shares are brought into account when the right to receive payment is established.
Income from listed equity investments, including taxes deducted at source, is included in revenue by reference to the date on which the investment is quoted ex‑dividend. Where dividends are received in the form of additional shares rather than cash dividends, the equivalent of the cash dividend is recognised as the income in the revenue account and any excess in the value of the shares received over the amount of the cash dividend is recognised in the capital reserve - realised.
Expenses
All expenses are accounted for on an accruals basis. All administrative expenses are charged wholly to the revenue account.
Dividends
Dividend distributions to shareholders are recognised as a liability in the year that they are approved unconditionally.
Current and other non‑current assets
Financial assets and financial liabilities are recognised in HGT's balance sheet when HGT becomes a party to the contractual provisions of the instrument. Trade receivables are stated at nominal value. Appropriate allowances for estimated irrecoverable amounts are recognised in the revenue return on the income statement.
Cash comprises current accounts held with banks.
Foreign currency
The functional and presentation currency is pounds sterling, reflecting the economic environment in which HGT predominantly operates. All transactions in foreign currencies are translated into sterling at the rates of exchange ruling at the dates of such transactions and the resulting exchange differences are taken to the capital reserve - realised or revenue, as appropriate. Foreign currency assets and liabilities at the balance sheet date are translated into sterling at the exchange rates ruling at that date and the resulting exchange differences are taken to the capital reserve - unrealised or revenue as appropriate.
Taxation
Income taxes represent the sum of the tax currently payable, withholding taxes suffered and deferred tax. Tax is charged or credited in the income statement. Deferred tax is recognised on all timing differences at the reporting date. These timing differences arise from the inclusion of income and expenses in tax assessments in periods different from those in which they are recognised in the financial statements.
Investments
The general principle applied is that investments should be reported at 'fair value', in accordance with Sections 11 and 12 of FRS 102 and the International Private Equity and Venture Capital ('IPEV') Valuation Guidelines, December 2018 edition. Where relevant, HGT applies the policies stated below to the investments held by the primary buyout funds, in order to determine the fair value of its investments in these limited partnerships.
Purchases of investments are recognised on a trade date basis. Sales of investments held through the primary buyout funds are recognised at the trade date of the disposal. Sales from the investments in Hg 6 E LP and the renewable energy funds would normally consist of capital distributions and these distributions are recognised as a realisation when the right to such distribution is established. Proceeds are measured at fair value, which is regarded as the proceeds of sale less any transaction costs.
Quoted: Quoted investments are held at fair value, which is deemed to be their bid price.
Unquoted: Unquoted investments are also held at fair value and are valued using the following guidelines:
(i) initially, investments are valued at the price of recent investments less fees. Subsequently, investments are valued based on (ii) to (iv) below;
(ii) the level of maintainable earnings or revenue and an appropriate earnings or revenue multiple, unless (iv) is required;
(iii) where more appropriate, investments can be valued based on other methodologies, including using their net assets or discounted cash flows, rather than on their earnings or revenue; and
(iv) appropriate fair value movements are made against all individual valuations where necessary to reflect unsatisfactory financial performance or a fall in comparable ratings.
Limited partnership funds: these are investments that are set up by a manager in which HGT has a direct investment, but is not the sole limited partner and does not hold a majority share. These investments are valued at fair value, based on the Manager's valuation after any adjustment required by the Directors.
Liquidity funds: these are short‑term investments made in a combination of fixed and floating rate securities and are valued at the current fair value as determined by the manager of the fund. They can be realised at short notice.
Derivative financial instruments: derivative financial instruments are held at fair value and are valued using quoted market prices for financial instruments traded in active markets, or dealer price quotations for financial instruments that are not actively traded.
Both realised and unrealised gains and losses arising on fixed asset investments, financial assets and liabilities and derivative financial instruments, are taken to the capital reserves.
Capital reserves
Capital reserve - realised
The following are accounted for in this reserve:
(i) gains and losses on the realisation of investments;
(ii) attribution of gains to the founder partners for carried interest;
(iii) losses on investments where there is little prospect of realisation or recovering any value;
(iv) realised exchange differences of a capital nature; and
(v) expenses, together with the related taxation effect, charged to this reserve in accordance with the above policies.
Capital reserve - unrealised
The following are accounted for in this reserve:
(i) increases and decreases in the valuation of investments held at the year‑end;
(ii) increases and decreases in the valuation of the loans to general partners; and
(iii) unrealised exchange differences of a capital nature.
Share capital
Ordinary shares issued are recognised based on the proceeds or fair value received, with the excess of the amount received over their nominal value being credited to the share premium account. Direct issue costs are deducted from equity.
Critical accounting estimates and key sources of estimation uncertainty
The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reported year. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results may ultimately differ from those estimates.
The estimates and assumptions are reviewed on an on‑going basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
The key accounting estimate is in respect of the determination of the fair value of financial assets classified as fair value through profit or loss (FVTPL). The methodology used in determining fair values is disclosed above. An attribution analysis of movements in the fair value of investments can be found on page 41 in the full Annual Report and Accounts and an analysis of the trading performance and valuation and gearing analysis of the top 20 buyout investments by value can be found on pages 42 and 43 in the full Annual Report and Accounts. A sensitivity analysis to equity price risk can be found in Note 19.
4. Income | ||
| Revenue return | |
| 2019 £'000 | 2018 £'000 |
Total net income comprises: |
|
|
Interest | 15,549 | 16,349 |
Dividend | - | 706 |
Non-interest income | - | 73 |
Total net income | 15,549 | 17,128 |
All income that is recognised by the primary buyout funds, net of PPS, is allocated to HGT and recognised when the right to this income is established. This income and PPS is analysed further below.
| Revenue return | |
| 2019 £'000 | 2018 £'000 |
Income from investments held by the primary buyout funds |
|
|
Unquoted investment income | 27,847 | 19,453 |
Dividend income | - | 706 |
Other investment income: |
|
|
Unquoted investment income | 1,378 | 1,161 |
Liquidity funds income | 1,788 | 1,033 |
Total investment income | 31,013 | 22,353 |
Total other income | 46 | 128 |
Total income | 31,059 | 22,481 |
Priority profit share charge against income: |
|
|
Current year - HGT 8 LP | (10,463) | (1,315) |
Current year - HGT 7 LP | (2,148) | (2,445) |
Current year - HGT Mercury 2 LP | (1,654) | (736) |
Current year - HGT Saturn LP | (665) | (304) |
Current year - HgCapital Mercury D LP | (392) | (409) |
Current year - HGT Transition Capital LP | (188) | (52) |
Current year - HGT LP | - | (92) |
Total priority profit share charge against income (Note 5(a)) | (15,510) | (5,353) |
Total net income | 15,549 | 17,128 |
5. Priority profit share and carried interest
(a) Priority profit share payable to General Partners | Revenue return | |
2019 £'000 | 2018 £'000 | |
Priority profit share payable: |
|
|
Current year amount | 10,831 | 11,678 |
Less: Current year loans advanced to General Partners (Note 5(b)) | (31) | (6,325) |
Add: Prior year loans received from General Partners (Note 5(b)) | 4,710 | - |
Current year charge against income | 15,510 | 5,353 |
Total priority profit share charge against income | 15,510 | 5,353 |
The priority profit share payable on the primary buyout funds rank as a first appropriation of net income from investments held in these partnerships respectively and is deducted prior to such income being attributed to HGT in its capacity as a Limited Partner. The net income of the primary buyout funds earned during the year, after the deduction of the priority profit share, is shown on the income statement. Details of these arrangements are disclosed in the Directors' report on page 110 in the full Annual Report and Accounts.
The terms of the above priority profit share arrangements during 2019 were:
Primary buyout Fund partnership | Priority profit share |
HGT 8 LP | 1.75% on the fund commitment during the investment period |
HGT Mercury 2 LP | 1.75% on the fund commitment during the investment period |
HGT 7 LP | 1.5% of original cost of investments in the fund less the original cost of investments that have been realised or written‑off |
HgCapital Mercury D LP | 1.5% of original cost of investments in the fund less the original cost of investments that have been realised or written‑off |
HGT 6 LP | 1.5% of original cost of investments in the fund less the original cost of investments that have been realised or written‑off |
HGT Saturn LP | 1.0% on invested capital |
HGT Transition Capital LP | 1.25% on invested capital |
HGT LP | 0.5% on the value of investments in fund, excluding co‑investments |
In addition, priority profit shares are payable on partnerships where HGT is a minority limited partner invested pari passu with other institutional investors. These amounts are initially and indirectly funded by HGT through the amounts invested in these partnerships and these amounts are recognised as unrealised losses in the capital account in the income statement.
Fund partnership | Priority profit share |
Hg 6 E LP | 1.5% of original cost of investments in the fund, less the original cost of investments that have been realised or written‑off. |
Asper Renewable Power Partners 2 C LP | 1.25% of lesser of value or cost of investments. |
Asper Renewable Power Partners LP | 1.5% of original cost of investments in the fund, less the original cost of investments that have been realised or written‑off. |
(b) Priority profit share loans to General Partners | Capital return | |
2019 £'000 | 2018 £'000 | |
Movement on loans to General Partners: |
|
|
Losses on current year loans advanced to General Partners | (31) | (6,325) |
Gains on prior year loans recovered from General Partners | 4,710 | - |
Total gains/(losses) on priority profit share loans advanced to General Partners | 4,679 | (6,325) |
In years in which the funds described in Note 5(a) have not yet earned sufficient net income to satisfy the priority profit share, the entitlement is carried forward to the following years. The priority profit share is payable quarterly in advance, even if insufficient net income has been earned. Where the cash amount paid exceeds the net income, an interest free loan is advanced to the general partner by these primary buyout funds, which is funded via a loan from HGT. Such loan is only recoverable from the general partner by an appropriation of net income, until sufficient net income is earned, no value is attributed to this loan and hence an unrealised capital loss is recognised and reversed if sufficient income is subsequently generated.
(c) Carried interest to Founder Partners | Capital return | |
2019 £'000 | 2018 £'000 | |
Carried interest charge against capital gains: |
|
|
Current year charge against realised capital gains | 1,511 | 55,023 |
Current year charge/(credit) against unrealised capital gains | 15,775 | (40,599) |
Total carried interest charge against capital gains | 17,286 | 14,424 |
The carried interest payable ranks as a first appropriation of capital gains, after preferred return, on the investments held in the primary buyout funds, limited partnerships established solely to hold HGT's investments, and is deducted prior to such gains being paid to HGT in its capacity as a Limited Partner. The net amount of capital gains of the primary buyout funds during the year, after the deduction of carried interest, is shown in the income statement.
The details of the carried interest contracts, disclosed in the Directors' report on page 110 in the full Annual Report and Accounts, state that carried interest is payable once a certain level of repayments have been made to HGT. Based on the repayments made during 2019, £1,511,000 (2018: £55,023,000) of carried interest was paid in respect of the current financial year. If the investments in HGT 6 LP, HGT 7 LP, HgCapital Mercury D LP and Hg 6 E LP are realised at the current fair value and then distributed to Partners, an amount of £58,087,000 will be payable to the Founder Partner (2018: £42,312,000 payable to the Founder Partner) and therefore the Directors have made a provision for this amount (see Note 12). No provision is required in respect of HGT's investment in the other fund limited partnerships, because they are still in their investment period.
6. Other expenses
| Revenue return | |
(a) Operating expenses | 2019 £'000 | 2018 £'000 |
Registrar, management and administration fees | 975 | 837 |
Directors' remuneration (Note 8) | 284 | 261 |
Legal and other administration costs1 | 1,927 | 1,302 |
| 3,186 | 2,400 |
Fees payable to HGT's auditor in relation to HGT: |
|
|
Audit fees2 | 102 | 68 |
Total fees payable to HGT's auditor | 102 | 68 |
Total other expenses | 3,288 | 2,468 |
1Includes employer's National Insurance contributions of £31,838 (2018: £29,427).
2In addition to the audit fees payable to the auditor in relation to HGT, audit fees payable to the auditor in respect of the audit of the primary buyout funds were £46,000 (2018: £44,000).
| Revenue return | |
(b) Finance costs | 2019 £'000 | 2018 £'000 |
Non-utilisation fees and other expenses | 755 | 753 |
Total finance costs | 755 | 753 |
7. Cash flow from operating activities
Reconciliation of net return before finance costs and taxation to net cash flow from operating activities | 2019 £'000 | 2018 £'000 |
Net return before finance costs and taxation | 178,329 | 102,127 |
Gains on investments held at fair value and liquidity funds | (179,785) | (54,297) |
Carried interest paid | (1,511) | (55,023) |
Increase/(decrease) in carried interest provision | 15,775 | (40,599) |
Increase in accrued income from liquidity funds | (1,788) | (1,033) |
(Increase)/decrease in prepayments, accrued income and other debtors | (15,989) | 31,577 |
Increase/(decrease) in creditors | 288 | (616) |
Taxation received | 24 | 14 |
Net cash outflow from operating activities | (4,657) | (17,850) |
8. Directors' remuneration
The aggregate remuneration of the Directors for the year to 31 December 2019 was £284,000 (2018: £261,462). Further information on the Directors' remuneration is disclosed in the Directors' remuneration report on pages 125 to 128 in the full Annual Report and Accounts.
9. Taxation
In the opinion of the Directors, HGT has complied with the requirements of Section 1158 and Section 1159 of the CTA 2010 and will therefore be exempt from corporation tax on any capital gains reported in the capital return during the year. To the extent possible, HGT will elect to designate all of the proposed dividend (see Note 11) as an interest distribution to its shareholders. This distribution is treated as a tax deduction against taxable income in the revenue return and results in a reduction of corporation tax being payable by HGT at 31 December 2019.
The rate of corporation tax in the UK for a company was 19% during the year (2018: tax rate of 19%). However, the tax charge in the current and prior year was lower than the standard and effective tax rate, largely due to the reduction in corporation tax from the interest distribution noted above. The effect of this and other items affecting the tax charge is shown in Note 9(b) below.
| Revenue return | |
(a) Analysis of charge in the year | 2019 £'000 | 2018 £'000 |
Current tax: |
|
|
UK corporation tax | 1,626 | 2,173 |
Income streaming relief | (1,626) | (2,173) |
Prior year adjustment | (24) | (17) |
Current revenue tax credit for the year | (24) | (17) |
Deferred tax: |
|
|
Reversal of timing differences | 104 | 259 |
Total deferred tax charge for the year (Note 9(c)) | 104 | 259 |
Total taxation charge | 80 | 242 |
| Revenue return | |
(b) Factors affecting current tax charge for the year | 2019 £'000 | 2018 £'000 |
Net revenue return before taxation | 11,506 | 13,907 |
UK corporation tax charge at 19% thereon (2018: 19%) | 2,186 | 2,642 |
Effects of: |
|
|
Tax relief from interest distribution | (1,626) | (2,173) |
Tax relief from expenses allocated to capital | (456) | (210) |
Prior year tax adjustment | (24) | (17) |
Total differences | (2,106) | (2,400) |
Total taxation charge | 80 | 242 |
| Revenue return | |
(c) Deferred tax | 2019 £'000 | 2018 £'000 |
Deferred tax: |
|
|
Movement in taxable income not recognised in revenue return | 104 | 259 |
Total deferred tax charge for the year (Note 9(a)) | 104 | 259 |
Deferred tax recoverable: |
|
|
Recoverable deferred tax at 31 December | 104 | 363 |
Deferred tax charge for the year | (104) | (259) |
Recoverable deferred tax at end of year (Note 14) | - | 104 |
Deferred tax assets of £nil were recognised at 31 December 2019 (2018: £104,000 at a 19% tax rate)
10. Return and net asset value per Ordinary share
(a) Return per Ordinary share | Revenue return | Capital return | ||
2019 | 2018 | 2019 | 2018 | |
Amount (£'000): |
|
|
|
|
Net return after taxation | 11,426 | 13,665 | 166,068 | 87,467 |
Weighted average number of Ordinary shares ('000): |
|
|
|
|
Weighted average number of Ordinary shares in issue | 388,267 | 37,325 | 388,267 | 37,325 |
Return per Ordinary share (pence)* | 2.94 | 3.66 | 42.77 | 23.43 |
*All per share workings have been restated for the ten for one share split in May 2019.
| Capital return | |
(b) Net asset value per Ordinary share | 2019
| 2018
|
Amount (£'000): |
|
|
Net assets | 1,039,298 | 804,987 |
Number of Ordinary shares ('000): |
|
|
Number of Ordinary shares in issue | 407,425 | 37,325 |
Net asset value per Ordinary share (pence)* | 255.1 | 215.7 |
*All per share workings have been restated for the ten for one share split in May 2019.
11. Dividends on Ordinary shares
|
Record date |
Payment date | 2019 £'000 | 2018 £'000 |
Interim Dividend of 1.8p for the year ended 31 December 2019 | 20 September 2019 | 25 October 2019 | 7,247 | - |
Final Dividend of 30.0p for the year ended 31 December 2018 | 22 March 2019 | 30 April 2019 | 11,197 | - |
Interim Dividend of 16.0p for the year ended 31 December 2018 | 20 September 2018 | 26 October 2018 | - | 5,972 |
Final Dividend of 30.0p for the year ended 31 December 2017 | 29 March 2018 | 27 April 2018 | - | 11,197 |
Total equity dividends paid |
|
| 18,444 | 17,169 |
The proposed final dividend of 3.0p per Ordinary share for the year ended 31 December 2019 is subject to approval by the shareholders at the annual general meeting and has not been included as a liability in these financial statements. The total dividends payable in respect of the financial year, which form the basis of the retention test as set out in Section 1159 of the CTA 2010, are set out below:
| 2019 £'000 | 2019 £'000 |
Revenue available for distribution by way of dividend for the year | 11,426 | 13,665 |
Interim dividend of 1.8p for the year ended 31 December 2019 (paid on 25 October 2019) | (7,247) | (5,972) |
Proposed final dividend of 3.0p for the year ended 31 December 2019 | (12,223) | (11,197) |
Distributions in excess of revenue for Section 1159 purposes* | (8,044) | (3,504) |
*Distributions in excess of revenue are financed by the revenue reserve
12. Fixed asset investments
| 2019 £'000 | 2018 £'000 |
Investments held at fair value through profit or loss: |
|
|
Unquoted investments held in HGT 7 LP | 255,127 | 248,186 |
Unquoted investments held in HGT 8 LP | 217,635 | 93,887 |
Unquoted investments held in HGT LP | 137,075 | 111,544 |
Unquoted investments held in HGT Saturn LP | 114,981 | 66,427 |
Unquoted investments held in HGT Mercury 2 LP | 39,679 | 37,105 |
Unquoted investments held in HgCapital Mercury D LP | 38,432 | 38,595 |
Unquoted investments held in HGT 6 LP | 24,099 | 18,275 |
Unquoted investments held in HGT Transition Capital LP | 16,049 | 14,962 |
Other unquoted investments held by HGT | 3,023 | 22,994 |
Total fixed asset investments gross of carried interest provision | 846,100 | 651,975 |
Carried interest provision (Note 5(c)) | (58,087) | (42,312) |
Total fixed asset investments | 788,013 | 609,663 |
Total fixed asset investments consist of: |
|
|
Fund limited partnerships | 788,013 | 609,663 |
| 2019 £'000 | 2018 £'000 |
Opening valuation as at 1 January | 609,663 | 490,976 |
Opening unrealised appreciation - investments | (173,265) | (166,260) |
Opening carried interest provision | 42,312 | 82,911 |
Opening book cost as at 1 January | 478,710 | 407,627 |
Movements in the year: |
|
|
Additions at cost | 117,284 | 187,338 |
Disposals - proceeds | (103,558) | (218,925) |
- realised gains on sales | 24,578 | 102,670 |
Closing book cost of investments | 517,014 | 478,710 |
Add: closing unrealised appreciation - investments | 329,086 | 173,265 |
Less: closing carried interest provision | (58,087) | (42,312) |
Closing valuation of investments at 31 December | 788,013 | 609,663 |
The investments above include investments in companies that are indirectly held by HGT through its investment in the primary buyout funds as set out in Note 3 on page 82 in the full Annual Report and Accounts, and investments in fund limited partnerships in Hg 6 E LP, Asper Renewable Power Partners LP and Asper Renewable Power Partners 2 C LP. The net assets attributable to partners at 31 December 2018, being the date of the last audited balance sheet, of these primary buyout funds were £121,583,668 (HGT LP), £18,262,107 (HGT 6 LP), £265,824,438 (HGT 7 LP), £44,339,307 (HgCapital Mercury D LP), £97,461,321 (HGT 8 LP), £37,671,909 (HGT Mercury 2 LP), £67,761,370 (HGT Saturn LP) and £15,643,564 (HGT Transition Capital LP).
13. Gains on investments and liquidity funds
| Capital return | |
| 2019 £'000 | 2018 £'000 |
Realised: |
|
|
Realised gains/(losses) - fixed asset investments | 24,578 | 102,670 |
- liquidity funds | 408 | 1,057 |
- aborted deal fees | (2,402) | (1,939) |
| 22,584 | 101,788 |
Carried interest charge against realised capital gains (Note 5(c)) | (1,511) | (55,023) |
Net realised gains | 21,073 | 46,765 |
Unrealised: |
|
|
Unrealised gains/(losses) - fixed asset investments | 155,821 | 7,005 |
- aborted deal fees | (219) | 835 |
- liquidity funds | 489 | (1,412) |
| 156,091 | 6,428 |
Carried interest (charge)/credit against unrealised capital gains (Note 5(c)) | (15,775) | 40,599 |
Net unrealised gains | 140,316 | 47,027 |
Total gains | 161,389 | 93,792 |
Page 41 of the Manager's Review in the full Annual Report and Accounts contains an analysis of all material realised and unrealised movements in value of individual investments held as fixed asset investments, in accordance with paragraph 28 and 29 of the 'SORP'.
14. Debtors and accrued income
| 2019 £'000 | 2018 £'000 |
Amounts receivable after one year: |
|
|
Accrued income on fixed assets | 54,266 | 39,531 |
Amounts receivable within one year: |
|
|
Deferred tax recoverable (Note 9(c)) | - | 104 |
Prepayments and accrued income | 2,024 | 50 |
Deferred consideration | 6,937 | - |
Total amounts receivable within one year | 8,961 | 154 |
Total debtors | 63,227 | 39,685 |
The Directors consider that the carrying amount of debtors approximates their fair value.
15. Liquidity funds
| 2019 £'000 | 2018 £'000 |
Investments held at fair value through profit or loss: |
|
|
Opening valuation | 152,920 | 155,938 |
Purchases at cost | 90,000 | 222,882 |
Redemptions | (61,100) | (226,578) |
Movement in unrealised capital gains/(losses) | 489 | (1,412) |
Movement in accrued income | 1,788 | 1,033 |
Realised capital gains | 408 | 1,057 |
Closing valuation | 184,505 | 152,920 |
16. Movement in net funds
| 2019 £'000 | 2018 £'000 |
Analysis and reconciliation of net funds: |
|
|
Change in cash | 1,122 | (489) |
Net funds at 1 January | 3,436 | 3,925 |
Net funds at 31 December | 4,558 | 3,436 |
Net funds comprise: |
|
|
Cash | 4,558 | 3,436 |
17. Creditors - amounts falling due within one year
| 2019 £'000 | 2018 £'000 |
Accruals | 1,231 | 886 |
Total creditors | 1,231 | 886 |
The Directors consider that the carrying amount of creditors approximates their fair value.
18. Bank facility
On 24 August 2011, HGT entered into a £40,000,000 multi‑currency revolving credit standby facility on an unsecured basis. In December 2015, the facility was extended by a further three and a half years to 30 June 2019. In addition, the facility was increased to £80,000,000. Under the facility agreement, HGT is liable to pay interest on any drawn amount at LIBOR plus a margin of 2.25% to 2.50%, dependent on the loan to value ratio. A commitment fee of 0.9% p.a. is liable on any undrawn commitment. In March 2019, the facility was extended until 30 June 2022 with the option of adding a further £80 million via an 'accordion' facility, subject to the bank's agreement at the time. The facility was undrawn as at the end of the year.
19. Financial risk
The following disclosures relating to the risks faced by HGT are provided in accordance with sections 11 and 12 of FRS 102. The reference to investments in this Note is in relation to HGT's direct investments in Asper RPP I LP, Asper RPP II LP, Hg 6E LP and the underlying investments in HGT LP, HGT 6 LP, HGT 7 LP, HGT 8 LP, HgCapital Mercury D LP,HGT Mercury 2 LP, HGT Saturn LP and HGT Transition Capital LP as described in Note 3 on page 82 in the full Annual Report and Accounts.
Financial instruments and risk profile
HGT's investment objective is to achieve long‑term capital appreciation by indirectly investing in unquoted companies. It does this through its investments in fund partnerships, mostly in the UK and Europe. Additionally, HGT holds UK Government securities, cash, liquidity funds and items such as debtors and creditors arising directly from its operations. In pursuing its investment objective, HGT is exposed to a variety of risks that could result in either a reduction of HGT's net assets or a reduction in the profits available for distribution by way of dividends. Valuation risk, market risk (comprising currency risk and interest rate risk), liquidity risk and credit risk, and the Directors' approach to the management of them, are described below. The Board and Hg coordinate HGT's risk management. The objectives, policies and processes for managing the risks, and the methods used to manage the risks, that are set out below, have not changed from the previous accounting period.
Valuation risk
HGT's exposure to valuation risk arises mainly from movements in the value of the underlying investments (held through fund partnerships), the majority of which are unquoted. A breakdown of HGT's portfolio is given on page 45 in the full Annual Report and Accounts and a breakdown of the most significant underlying investments is given on page 52 in the full Annual Report and Accounts. In accordance with HGT's accounting policies, the investments in fund limited partnerships are valued by reference to their underlying unquoted investments, which are valued by the Directors following the IPEV Valuation Guidelines. HGT does not hedge against movements in the value of these investments, apart from foreign exchange movements as explained below, though the borrowing arranged to fund these investments is normally denominated in the currency in which the business is operating and valued (see page 97 in the full Annual Report and Accounts). HGT has exposure to interest rate movements, through bank deposits and liquidity funds.
In the opinion of the Directors, the diversified nature of HGT's investments significantly reduces the risks of investing in unquoted companies.
FRS 102 requires HGT to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels:
• Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).
• Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2).
• Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).
The level in the fair value hierarchy, within which the fair value measurement is categorised in its entirety, is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that is a level 3 measurement. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability.
The determination of what constitutes an 'observable' input requires significant judgement by the Board. The Board considers observable data relating to investments actively traded in organised financial markets, in which case fair value is generally determined by reference to stock exchange quoted market bid prices at the close of business on the balance sheet date, without adjustment for transaction costs necessary to realise the asset.
The following table analyses, within the fair value hierarchy, the fund's financial assets (by class) measured at fair value at 31 December.
| Level 1 £'000 | Level 2 £'000 | Level 3 £'000 | Total £'000 |
Investments held at fair value through profit or loss: |
|
|
|
|
Unquoted investments - Investment in HGT 7 LP | - | - | 255,127 | 255,127 |
- Investment in HGT 8 LP | - | - | 217,635 | 217,635 |
- Investment in HGT LP | - | - | 137,075 | 137,075 |
- Investment in HGT Saturn LP | - | - | 114,981 | 114,981 |
- Investment in HGT Mercury 2 LP | - | - | 39,679 | 39,679 |
- Investment in HgCapital Mercury D LP | - | - | 38,432 | 38,432 |
- Investment in HGT 6 LP | - | - | 24,099 | 24,099 |
- Investment in HGT Transition Capital LP | - | - | 16,049 | 16,049 |
- Investment in Asper RPP I LP | - | - | 1,808 | 1,808 |
- Investment in Hg 6 E LP | - | - | 1,215 | 1,215 |
- Liquidity funds | - | 184,505 | - | 184,505 |
- Carried interest provision | - | - | (58,087) | (58,087) |
- Uninvested capital in limited partnerships | - | - | 226 | 226 |
As at 31 December 2019 | - | 184,505 | 788,239 | 972,744 |
| Level 1 £'000 | Level 2 £'000 | Level 3 £'000 | Total £'000 |
Investments held at fair value through profit or loss: |
|
|
|
|
Unquoted investments - Investment in HGT 7 LP | - | - | 248,186 | 248,186 |
- Investment in HGT LP | - | - | 111,544 | 111,544 |
- Investment in HGT 8 LP | - | - | 93,887 | 93,887 |
- Investment in HGT Saturn LP | - | - | 66,427 | 66,427 |
- Investment in HgCapital Mercury D LP | - | - | 38,595 | 38,595 |
- Investment in HGT Mercury 2 LP | - | - | 37,105 | 37,105 |
- Investment in Asper RPP II LP | - | - | 20,266 | 20,266 |
- Investment in HGT 6 LP | - | - | 18,275 | 18,275 |
- Investment in HGT Transition Capital LP | - | - | 14,962 | 14,962 |
- Investment in Asper RPP I LP | - | - | 1,766 | 1,766 |
- Investment in Hg 6 E LP | - | - | 962 | 962 |
- Liquidity funds | - | 152,920 | - | 152,920 |
- Carried interest provision | - | - | (42,312) | (42,312) |
- Uninvested capital in limited partnerships | - | - | 169 | 169 |
As at 31 December 2018 | - | 152,920 | 609,832 | 762,752 |
Investments whose values are based on quoted market prices in active markets, and therefore classified within level 1, include government securities and actively traded listed equities. HGT does not adjust the quoted bid price of these investments.
Financial instruments that trade in markets that are not considered to be active, but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs, are classified within level 2. As level 2 investments include positions that are not traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non‑transferability, which are generally based on available market information.
Investments classified within level 3 have significant unobservable inputs. Level 3 instruments include private equity and corporate debt securities. As observable prices are not available for these securities, the Board has used valuation techniques to derive the fair value. In respect of unquoted instruments, or where the market for a financial instrument is not active, fair value is established by using recognised valuation methodologies, in accordance with IPEV Valuation Guidelines. Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction.
There were no transfers of assets from level 1 to level 2 or 3, level 2 to level 1 or 3 and level 3 to level 1 or 2.
The following table presents the movement in level 3 investments for the year ended 31 December 2019 by class of financial instrument.
Total Investments in limited partnerships
| 2019 | 2018 |
Unquoted investments: |
|
|
Opening balance | 609,663 | 490,976 |
Purchases | 117,284 | 187,338 |
Realisations at 31 December 2018 valuation | (78,630) | (179,458) |
Unrealised appreciation of fixed asset investments | 155,471 | 70,208 |
Movement in net carried interest provision | (15,775) | 40,599 |
Closing unrealised valuation of level 3 investments | 788,013 | 609,663 |
Equity price risk
Equity price risk is the risk of a fall in the fair value of HGT's ownership interests (comprising equities and shareholder loans) held by HGT indirectly through its direct investments in fund limited partnerships. The Board revalues each investment on a quarterly basis. The Board manages the risks inherent in HGT's investment activities by ensuring full and timely access to relevant information from Hg. The Board meets regularly and at each meeting reviews the trading performance of the principal underlying investments. If there appears to the Board to be a fair value movement in value between regular valuations, it can revalue the investment. The Board also monitors Hg's compliance with HGT's investment objective and investment policy.
For unquoted equity investments, the market risk variable is deemed to be the multiples applied to a maintainable earnings figure to calculate the individual investment valuations within each of the primary buyout funds; borrowing is then deducted to arrive at a valuation of the net equity held by HGT. These multiples are largely based on the historic trading multiples of comparable businesses and therefore there is a potential impact on the valuation of unquoted investments of a fall in global equity markets. Hg's best estimate of the effect on the net assets of HGT due to a 1x reduction in the multiples applied to calculate the enterprise value of all unquoted investments, with all other variables held constant, is as follows:
| Change % | £'000 | NAV per Ordinary share Pence |
Sensitivity to equity price risk: 1x reduction in EV to EBITDA multipleapplied to unquoted investments |
|
|
|
Change in the value of unquoted investments |
| -59,864 | -14.7 |
A fall in the value of unquoted investments could be mitigated to some degree by a reduction in the provision for carried interest (£58 million at 31 December 2019), but only in funds where an adjustment for carried interest is required (Hg Genesis 6, Hg Genesis 7 and Mercury 1, see Note 5(c) above or on page 87 in the full Annual Report and Accounts). Hg's best estimate of the impact on the carried interest provision of the above change in value of unquoted investments is a reduction in the provision of £5,722,000 (or 1.4 pence per ordinary share). There are likely to be other correlations (either positive or negative) between the assumptions and other factors. Other inputs, such as the earnings of individual investments within the primary buyout funds are likely to have a significant impact on the value of unquoted investments. See page 42 of the Manager's report in the full Annual Report and Accounts for an analysis of the portfolio trading performance as at 31 December 2019. have a significant impact on the value of unquoted investments. The Board regularly stress tests the NAV.
Credit risk
Credit risk is the risk of financial loss in the event that any of HGT's market counterparties fail to fulfil their contractual obligations to HGT. HGT's financial assets (excluding fixed asset investments) that are subject to credit risk, were neither impaired nor overdue at the year‑end. HGT's cash balances were held with the Royal Bank of Scotland International and amounts not required for day‑to‑day use were invested in liquidity funds managed by Royal London Asset Management which are rated AAA by Fitch. Foreign exchange forward contracts and options are held with counterparties which have credit ratings which the Board considers to be adequate. The Board regularly monitors the credit quality and financial position of these market counterparties. The credit quality of the above mentioned financial assets was deemed satisfactory.
Market risk
The fair value of future cash flows of a financial instrument held by HGT may fluctuate due to changes in market prices of comparable businesses. This market risk may comprise: currency risk (see below), interest rate risk and/or equity price risk (see above). The Board of Directors reviews and agrees policies for managing these risks. Hg assesses the exposure to market risk when making each investment decision, and monitors the overall level of market risk across all of HGT's investments on an ongoing basis.
Currency risk and sensitivity
HGT is exposed to currency risk as a result of investing in fund partnerships which invest in companies that operate and are therefore valued in currencies other than sterling. The value of these assets in sterling, being HGT's functional currency, can be significantly influenced by movements in foreign exchange rates. Borrowing raised to fund each acquisition in such companies is normally denominated in the currency in which the business is operating and valued, thus limiting HGT's exposure to the value of its investments, rather than the gross enterprise value. From time to time, HGT is partially hedged against movements in the value of foreign currency against sterling where a movement in exchange rate could affect the value of an investment, as explained below. Hg monitors HGT's exposure to foreign currencies and reports to the Board on a regular basis. The following table illustrates the sensitivity of the revenue and capital return for the year in relation to HGT's year‑end financial exposure to movements in foreign exchange rates against sterling. The rates represent the range of movements against sterling over the current year for the currencies listed, and are considered the best estimate for movements looking forward.
In the opinion of the Directors, the sensitivity analysis below may not be representative of the year as a whole, since the level of exposure changes as HGT's holdings change through the purchase and realisation of investments to meet HGT's objectives.
| 2019 | 2018 | ||||||
| Revenue return | Capital return | Revenue return | Capital return | ||||
| £'000 | NAV per Ordinary share Pence | £'000 | NAV per Ordinary share Pence | £'000 | NAV per Ordinary share Pence | £'000 | NAV per Ordinary share Pence |
Highest value against sterling during the year: |
|
|
|
|
|
|
|
|
Danish krone (2019: 8.0395 / 2018: 8.2009) | 141 | 0.3 | 2,034 | 5.0 | 5 | - | 230 | 0.6 |
Euro (2019: 1.0772 / 2018: 1.0996) | 1,554 | 3.8 | 22,091 | 54.2 | 121 | 0.3 | 2,429 | 6.5 |
New Zealand dollar (2019: 1.8391 / 2018: 1.8199) | - | - | 102 | 0.3 | - | - | 104 | 0.3 |
Norwegian krone (2019: 10.6082 / 2018: 10.5910) | - | - | 20,095 | 49.3 | - | - | 5,924 | 15.9 |
US dollar (2019: 1.2063 / 2018: 1.2525) | 276 | 0.7 | 15,751 | 38.7 | 51 | 0.1 | 1,893 | 5.1 |
Potential gain if sterling depreciates | 1,971 | 4.8 | 60,073 | 147.5 | 177 | 0.4 | 10,580 | 28.4 |
Lowest value against sterling during the year: |
|
|
|
|
|
|
|
|
Danish krone (2019: 8.9549 / 2018: 8.6312) | (22) | (0.1) | (319) | (0.8) | (14) | - | (613) | (1.6) |
Euro (2019: 1.1983 / 2018: 1.1589) | (246) | (0.6) | (3,502) | (8.6) | (355) | (1.0) | (7,141) | (19.1) |
New Zealand dollar (2019: 2.0437 / 2018: 2.0370) | - | - | (59) | (0.1) | - | - | (161) | (0.4) |
Norwegian krone (2019: 12.0735 / 2018: 12.1385) | - | - | (7,393) | (18.1) | - | - | (1,692) | (4.5) |
US dollar (2019: 1.3345 / 2018: 1.4330) | (20) | (0.0) | (1,159) | (2.8) | (334) | (0.9) | (12,469) | (33.4) |
Value at risk if sterling appreciates | (288) | (0.7) | (12,432) | (30.4) | (703) | (1.9) | (22,076) | (59.0) |
At 31 December 2019, the following rates were applied to convert foreign denominated assets into sterling: Danish krone (8.8189); euro (1.1801); New Zealand dollar (1.9636); Norwegian krone (11.6410); and US dollar (1.3248).
Hedging
At times, HGT uses derivative financial instruments such as forward foreign currency contracts and option contracts to manage the currency risks associated with its underlying investment activities. The contracts entered into by HGT are denominated in the foreign currency of the geographic areas in which HGT has significant exposure against its reporting currency. The contracts are used for hedging and the fair values thereof are recorded in the balance sheet as investments held at fair value. Unrealised gains and losses are taken to capital reserves. At the balance sheet date, there were no outstanding derivative financial instruments (2018: nil).
HGT does not trade in derivatives but may hold them from time to time to hedge specific exposures with maturities designed to match the exposures they are hedging. It is the intention to hold both the financial investments giving rise to the exposure and the derivatives hedging them until maturity and therefore no net gain or loss is expected to be realised.
Derivatives are held at fair value, which represents the replacement cost of the instruments at the balance sheet date. Movements in the fair value of derivatives are included in the income statement. HGT does not adopt hedge accounting in the financial statements.
Interest rate risk and sensitivity
HGT has exposure to interest rate movements as this may affect the fair value of funds awaiting investment, interest receivable on liquid assets and managed liquidity funds, and interest payable on borrowings. HGT has little immediate direct exposure to interest rates on its fixed assets, as the majority of the underlying investments are fixed rate loans or equity shares that do not pay interest. Therefore, and given that HGT has no borrowings and maintains low cash levels, HGT's revenue return is not materially affected by changes in interest rates.
However, funds awaiting investment have been invested in managed liquidity funds and, as stated above, their valuation is affected by movements in interest rates. The sensitivity of the capital return of HGT to movements in interest rates has been based on the UK base rate. With all other variables constant, a 0.25% decrease in the UK base rate should increase the capital return in a full year by about £360,000, with a corresponding decrease if the UK base rate were to increase by 0.25%. In the opinion of the Directors, the above sensitivity analyses may not be representative of the year as a whole, since the level of exposure changes as investments are made and realised throughout the year.
Liquidity risk
Investments in unquoted companies, which form the majority of HGT's investments, may not be as readily realisable as investments in quoted companies, which might result in HGT having difficulty in meeting its obligations. Liquidity risk is currently not significant as 18% of HGT's net assets at the year‑end are liquid resources and, in addition, HGT has an £80 million multi‑currency undrawn bank facility available. The Board gives guidance to Hg as to the maximum amount of HGT's resources that should be invested in any one company. For further details refer to HGT's Investment Policy on page 13 in the full Annual Report and Accounts.
Currency and interest rate exposure
HGT's financial assets that are subject to currency and interest rate risk are analysed below:
| 2019 | 2018 | ||||||||
| Fixed and floating rate £'000 | Non‑ interest‑ bearing £'000 | Total £'000 | Total % |
| Fixed and floating rate £'000 | Non‑ interest‑ bearing £'000 | Total £'000 | Total % | |
Sterling | 189,289 | 201,388 | 390,677 | 37.9% |
| 156,525 | 177,523 | 334,048 | 41.5% | |
Euro | - | 247,475 | 247,475 | 23.9% |
| - | 193,686 | 193,686 | 24.0% | |
Norwegian krone | - | 206,393 | 206,393 | 20.1% |
| - | 143,429 | 143,429 | 17.8% | |
US dollar | - | 163,075 | 163,075 | 15.8% |
| - | 115,097 | 115,097 | 14.3% | |
Danish krone | - | 22,440 | 22,440 | 2.1% |
| - | 17,076 | 17,076 | 2.1% | |
New Zealand dollar | - | 1,508 | 1,508 | 0.2% |
| - | 2,383 | 2,383 | 0.3% | |
Total | 189,289 | 842,279 | 1,031,568 | 100.0% |
| 156,525 | 649,194 | 805,719 | 100.0% | |
Short‑term debtors and creditors, which are excluded, are mostly denominated in sterling, the functional currency of HGT. The fixed and floating rate assets consisted of cash and liquidity funds, of which the underlying investments are a combination of fixed and floating rate. The non‑interest‑bearing assets represent the investments held in fund limited partnerships, net of the provision for carried interest.
Capital management policies and procedures
HGT's capital management objectives are to ensure that it will be able to finance its business as a going concern and to maximise the revenue and capital return to its equity shareholders.
HGT's capital at 31 December comprised:
| 2019 £'000 | 2018 £'000 |
Equity: |
|
|
Equity share capital | 10,186 | 9,331 |
Share premium | 194,774 | 120,368 |
Capital redemption reserve | 1,248 | 1,248 |
Retained earnings and other reserves | 833,090 | 674,040 |
Total capital | 1,039,298 | 804,987 |
With the assistance of Hg, the Board monitors and reviews the broad structure of HGT's capital on an ongoing basis. This review covers:
• the projected level of liquid funds (including access to bank facilities);
• the desirability of buying back equity shares, either for cancellation or to hold in treasury, balancing the effect (if any) this may have on the discount at which shares in HGT are trading against the advantages of retaining cash for investment;
• the opportunity to raise funds by an issue of equity shares; and
• the extent to which revenue in excess of that which is required to be distributed should be retained, whilst maintaining its status under Section 1158 of the CTA 2010.
HGT's objectives, policies and processes for managing capital are unchanged from the preceding accounting period.
20. Called‑up share capital
| 2019 | 2018 | ||
No. '000 | £'000 | No. '000 | £'000 | |
Ordinary shares of 2.5p each: |
|
|
|
|
Allotted, called-up and fully paid: |
|
|
|
|
At 1 January | 37,325 | 9,331 | 37,325 | 9,331 |
Sub-division of Ordinary shares | 335,922 | - | - | - |
Issues of Ordinary shares | 34,178 | 855 | - | - |
At 31 December | 407,425 | 10,186 | 37,325 | 9,331 |
Total called-up share capital | 407,425 | 10,186 | 37,325 | 9,331 |
Whilst HGT no longer has an authorised share capital, the Directors will still be limited as to the number of shares they can at any time allot, as the Companies Act 2006 requires that Directors seek authority from shareholders for the allotment of new shares.
21. Share premium account and reserves
| Share premium account £'000 | Capital redemption reserve £'000 | Capital Reserve unrealised £'000 | Capital reserve realised £'000 | Revenue reserve £'000 |
As at 1 January 2019 | 120,368 | 1,248 | 119,958 | 523,528 | 30,554 |
Issues of Ordinary shares | 74,406 | - | - | - | - |
Transfer on disposal of investments | - | - | 350 | (350) | - |
Gains on liquidity funds | - | - | 489 | 408 | - |
Losses on aborted deal fees | - | - | (219) | (2,402) | - |
Net gain on sale of fixed asset investments | - | - | - | 24,928 | - |
Net movement in unrealised appreciation | - | - | 155,471 | - | - |
Dividend paid | - | - | - | - | (18,444) |
Net revenue return | - | - | - | - | 11,426 |
Net loans recovered from General Partners | - | - | 4,679 | - | - |
Carried interest | - | - | (15,775) | (1,511) | - |
As at 31 December 2019 | 194,774 | 1,248 | 264,953 | 544,601 | 23,536 |
22. Commitment in fund partnerships and contingent liabilities
Fund | Original commitment £'000 | Outstanding at 31 Dec | |
2019 £'000 | 2018 £'000 | ||
HGT 8 LP 1 | 350,000 | 143,542 | 247,905 |
HGT Saturn LP 1 | 150,000 | 69,276 | 92,411 |
HGT Transition Capital LP 1 | 75,000 | 59,122 | 59,460 |
HGT Mercury 2 LP 1 | 80,000 | 36,690 | 49,774 |
HGT 7 LP | 200,000 | 19,979 | 5,451 |
HgCapital Mercury D LP 2 | 60,000 | 3,277 | 3,228 |
HGT 6 LP 2 | 285,029 | 2,380 | 3,750 |
HGT LP 2 | 120,000 | 1,261 | 1,261 |
Asper RPP I LP | 18,338 3 | 587 4 | 749 |
Hg 6 E LP 2 | 15,000 | 118 | 197 |
Asper RPP II LP | 33,895 5 | - | 6,607 |
Total outstanding commitments |
| 336,232 | 470,793 |
1HGT has the benefit of an opt‑out provision in connection with its commitments to invest alongside Hg Genesis 8, Hg Mercury 2, 221.4% of the original £120 million commitment to the HgCapital 5 Fund, 5.5% of the original £300 million to the HgCapital 6 Fund 3Sterling equivalent of €21,640,000. 4Sterling equivalent of €692,000 (2018: €834,000). 5Sterling equivalent of €40,000,000. | |||
23. Key agreements, related party transactions and ultimate controlling party
Key agreements, related party transactions and ultimate controlling party
Hg acts as Manager of HGT through a management agreement and indirectly participates through fund limited partnership agreements as the general partners and, alongside a number of Hg's executives (past and present), as the founder partners of the fund partnerships in which HGT invests. In addition, Hg acts as Administrator of HGT.
HGT has no ultimate controlling party.
HGT's related parties are its Directors. Fees paid to HGT's board are disclosed in the Directors' Remuneration Report on page 127 in the full Annual Report and Accounts and employer's National Insurance contributions are disclosed in Note 6(a). There are no other identified related parties at the year‑end, and as of 6 March 2020.
24. Post balance sheet events
Since 31 December 2019, the Board has approved a further investment commitment, totalling $400 million. This is described in the Chairman's Statement above (and on page 11 in the full Annual Report and Accounts).
Independent auditor's report
to the members of HgCapital Trust plc
The Company's financial statements for the year ended 31 December 2019 have been audited by Grant Thornton UK LLP. The text of the Auditor's Report can be found on pages 101 to 105 of the full Annual Report and Accounts.
Extract from full Annual Report and Accounts
The Directors present the Annual Report and Accounts of HgCapital Trust plc ('HGT') (Reg. No. 1525583) for the year ended 31 December 2019.
The Corporate Governance Report forms part of the Directors Report on pages 107 to 114 in the full Annual Report and Accounts. Information about future developments and important events since the year end are included in the Chairman's statement above and on pages 10 to 12 in the full Annual Report and Accounts.
Results and dividend
The total return after taxation for the year, was £177,494,000 (2018: £101,132,000) of which the revenue return was £11,426,000 (2018: revenue return of £13,665,000).
Following payment of an interim dividend of 1.8 pence per Ordinary share in October 2019, the Directors recommend the payment of a final dividend of 3 pence per Ordinary share for the year ended 31 December 2019, making a total of 4.8 pence (2018: 4.6 pence, adjusted for the share split). Subject to the approval of this dividend at the forthcoming Annual General Meeting ('AGM'), it will be paid on 15 May 2020 to shareholders on the register of members at the close of business on 20 March 2020.
Stewardship
For Hg, responsible investing means growing sustainable businesses which are great employers and good corporate citizens, whilst also generating superior risk adjusted returns for the shareholders of HGT, as well as other pensioners and savers who are invested with Hg. Hg, seeks to invest HGT's funds in businesses that are well managed, with high standards of corporate governance. The Directors of HGT believe this creates the proper conditions to enhance long‑term shareholder value and to achieve a high level of corporate performance.
The exercise of voting rights attached to HGT's underlying investments lies with Hg. Hg has a policy of active portfolio management and ensures that significant time and resource is dedicated to every investment, with Hg executives and Operating Partners typically being appointed to investee company boards, in order to ensure the application of active, results‑orientated corporate governance. Further information regarding the stewardship of investee companies by Hg can be found in their review on pages 23 to 75 in the full Annual Report and Accounts.
Greenhouse gas emissions
HGT has no greenhouse gas emissions to report from the operations of HGT, nor does it have responsibility for any other emissions producing sources reportable under the Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013 or the Companies (Directors' Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018. Information on our Manager's value chain carbon footprint can be found above (or on page 19 in the full Annual Report and Accounts), and online at https://hgcapital.com/responsibility/.
Financial Instruments
HGT had no outstanding derivative contracts at 31 December 2019. Note 19 to the financial statements describes the financial risk management objectives and HGT's exposures to credit risk and liquidity risk.
Annual General Meeting ('AGM')
The AGM of HGT, which will include a presentation by Hg, will be held at the offices of Hg, 2 More London Riverside, London SE1 2AP on 12 May 2020 at 11.00 a.m. Light refreshments will be available from 10.30 a.m. Notice of the AGM is given on pages 140 to 146 in the full Annual Report and Accounts. 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 resolutions 1 to 16, as set out in the Notice of Meeting.
Directors' responsibility statement
in respect of the annual report and accounts
The Directors are responsible for preparing the Annual Report and Accounts in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law) including FRS 102, "The Financial Reporting Standard applicable in the UK and Ireland".
Under company law the Directors must not approve the financial statements, unless they are satisfied that they give a true and fair view of the state of affairs of HGT and of the profit or loss of HGT for that period. In preparing these financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and accounting estimates that are reasonable and prudent;
• state whether applicable UK Accounting Standards have been followed;
• assess HGT's ability to continue as a going concern, disclosing, as applicable, matters relating to going concern; and
• use the going concern basis of accounting unless they either intend to liquidate HGT or to cease operations, or have no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain HGT's transactions and disclose with reasonable accuracy at any time the financial position of HGT and enable them to ensure that the financial statements comply with the Companies Act 2006.
They are responsible for such internal control as they determine necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have responsibility for taking such steps as are reasonably open to them to safeguard the assets of HGT and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statements that comply with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on HGT's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Responsibility statement
The Directors of HGT, whose names are shown on pages 108 to 109 in the full Annual Report and Accounts, each confirm to the best of their knowledge:
• the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of HGT taken as a whole; and
• the Strategic Report and Hg's Review include a fair review of the development and performance of the business and the position of HGT, together with a description of the principal risks and uncertainties that it faces.
The Directors consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and the information provided to shareholders is sufficient to allow them to assess HGT's position, performance, business model and strategy.
On behalf of the Board
Roger Mountford
Chairman
6 March 2020
Dividend
The final dividend proposed in respect of the year ended 31 December 2019 is 3 pence per share.
Ex‑dividend date (date from which shares are transferred without dividend) 19 March 2020
Record date (last date for registering transfers to receive the dividend) 20 March 2020
Last date for registering DRIP instructions (see below) 23 April 2020
Dividend payment date 15 May 2020
The final dividend is subject to approval of the shareholders at the forthcoming AGM.
Directors:
Roger Mountford
Richard Brooman
Peter Dunscombe
Jim Strang
Guy Wakeley
Anne West
National Storage Mechanism
A copy of the Annual Report and Accounts will be submitted shortly to the National Storage Mechanism ("NSM") and will be available for inspection at the NSM, which is situated at: www.morningstar.co.uk/uk/nsm
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
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