Annual Financial Report
H gCapital Trust plc
ANNUAL Results for the YEAR ended 31 DECEMBER 2020
Legal Entity Identifier: 213800J7QUJJBEFSIN38
London, 15 March 2021: HgCapital Trust plc ("HGT"), today announces its annual results for the year ended 31 December 2020. HGT provides investors with a listed vehicle to invest in unquoted businesses managed by Hg, Europe's largest investor in software & service businesses. 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.
HGT provides listed access to Hg's investments, which would in aggregate represent the second largest and the fastest growing technology firm in Europe1.
1 By Enterprise Value, Source: Hg, Factset
ROBUST PERFORMANCE shown by portfolio DURING 2020
WITH a NAV INCREASE of 24% to a new high of 310 PENCE per share
with net assets of £1.29 billion
RECORD LEVELS OF PORTFOLIO activity OVER THE YEAR WITH £403 MILLION INVESTED and £364 Million realised on behalf OF HGT
continued AND SIGNIFICANT outperformance of the FTSE All-share over
one, three, five, ten and twenty-year periods
SUMMARY performance
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28 February |
% Total |
31 December |
31 December |
% Total |
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NAV per share |
305.2p |
-1.7% |
310.3p |
255.1p |
+24.0% |
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Share price |
332.5p |
+9.0% |
305.0p |
257.5p |
+20.9% |
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FTSE All-Share Index |
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+1.2% |
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-9.8% |
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YTD 2021 |
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2020 |
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Net Asset Value |
£1.27bn |
-£21m |
£1.29bn |
£1.04bn |
+£252m |
Source: Hg, Factset
Note: Hg undertakes full revaluations of the portfolio on a quarterly basis, the next process being 31 March 2021, therefore the movement in unrealised value of the portfolio to the end of February 2021 is attributable to FX only.
Jim Strang, Chairman of HGT, commented:
"This last year has proven to be a uniquely challenging one with great difficulties, many hardships and sadly, for many, personal tragedy. Against this background HGT has performed extremely well, as the resilience and attractiveness of the investment model and the underlying investments have been proven. While 2021 seems set to be a year of further challenges, HGT is well placed to continue the progress of recent years in what will hopefully be an improving climate."
Luke Finch, Partner and Head of Client Services, Hg, commented:
"We are pleased that all of our most recent platform investments across our three fund families have been into companies where founders and management teams own significant stakes in their businesses. They have chosen to partner with Hg, and we believe this is testament to the focused scale and expertise which we have built in our defined end market 'clusters' and the strong network effect which has developed across the portfolio over the last two decades."
KEY HIGHLIGHTS 2020
¡ Net assets of close to £1.3 billion, with continued outperformance of the FTSE All-Share over one, three, five, ten and twenty-year periods
- NAV per share of 310p, a total return of 24% to 31 December 2020.
- Share price total return of +21% over the year.
- Proposed final dividend of 3.0p per share (full year dividend of 5.0p per share).
- An investment of £1,000 made 20 years ago would now be worth £14,799, a total return of 1,380%. An equivalent investment in the FTSE All-Share Index would be worth £2,4632.
¡ Strong double-digit growth from the realised and unrealised portfolio
- Revenue and EBITDA growth of 22% and 31% respectively across the top 20 investments (83% of the portfolio) over the last twelve months.
- £364 million of cash returned to HGT through realisations at uplifts to book value and refinancings.
- Valuation multiple (EV/EBITDA) of 22.1x and net debt to EBITDA ratio of 6.4x for the top 20 investments.
¡ Continued investment and commitments to drive future value
- Continued investment with £403 million invested on behalf of HGT into companies that Hg (the Manager) has known for many years and have demonstrated a track record of strong performance across market cycles.
- New commitments were made to the Hg Saturn 2, Hg Genesis 9, and Hg Mercury 3 funds, totalling £750 million, with total outstanding commitments at 31 December 2020 of £647 million (December 2019: £336 million). These will be deployed over the next three to four years.
§ Credit facility and new equity issuance
- In October, the Board of HGT completed a new £200 million multi-currency revolving credit facility.
- £25 million of new equity raised over 2020 via tap issues.
2 All references to total return allow for all historic dividends being reinvested
POST PERIOD EVENTS AS AT 28 FEBRUARY 2021
§ NAV of 305.2p , YTD performance of -1.7% reflecting FX movements.
§ Current net assets of £1.27 billion.
§ Share price of 332.5p , YTD performance of 9.0%.
§ Estimated £42 million from the sale of TeamSystem and A-Plan.
§ Estimated £72 million invested by HGT into Benevity, Geomatikk, Prophix and TeamSystem.
§ Liquid resources post-completion of all announced transactions and the full year dividend payable in May 2021, are £102 million (8% of 28 February pro-forma NAV).
§ Outstanding commitments of £543 million (43% of 28 February pro-forma NAV). We expect these to be drawn down over the next three to four years.
Outlook
Commentary from Hg (the Manager):
The combination of the long-term nature of listed private equity investment with the types of business that Hg invests in, and robust double-digit trading will continue to drive long-term growth
§ Against the backdrop of COVID-19, Hg's portfolio has performed well and contributed positively to stakeholders' livelihoods and retirements.
§ The overall portfolio valuations were up over 25% for the year to 31 December 2020, returning over £4 billion of liquidity to Hg investors, including £364 million to HGT.
§ As highlighted previously, COVID-19 has had a limited direct impact on the portfolio, given its defensive growth characteristics and we believe our investments will continue to benefit from ongoing trends in the digitalisation of business processes, across sectors and geographies.
§ The Hg UK-based businesses have seen limited direct consequences from Brexit. Where regulatory complexity exists, software typically provides part of the solution and we are seeing several instances of this across the portfolio.
§ The portfolio companies remain focused on selling business-critical and non-discretionary software and services to their underlying customers, typically with highly predictable business models and robust levels of recurring revenue.
§ Across our funds, we expect investment activity in the next 12 months to continue - cautiously and with discipline - into businesses that we have tracked for many years.
§ It has been a record year for realisations and further liquidity events are expected over the next twelve months.
§ Bolt-ons and strategic M&A within the portfolio remain a key focus and across the current portfolio we have multiple live M&A situations.
- Ends -
The Company's 2020 Annual Report and a video from the Chairman and Hg 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) 78 2459 2894 |
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Brunswick |
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Samantha Chiene |
+44 (0)20 7404 5959 |
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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 2020
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 business services 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 reinvested 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'.
Extracts from the Strategic Report
Financial and performance highlights
Annualised share price total return over the last 20 years: +14%
2020 performance:
NAV per share
at 31 December 2020 was 310.3p a total return for the year of:
+24.0%
(31 December 2019: +20.8%)
Please refer to note 10(b) on page 94 of the full annual report and accounts for further detail on the calculation of NAV per share
Net assets
The total NAV of HGT at 31 December 2020 was:
£1.29bn
(31 December 2019: £1.04bn)
Share price
at 31 December 2020 was 305.0p a total return for the year of:
+20.9%
(31 December 2019: +47.5%)
Market capitalisation
The market capitalisation of HGT at 31 December 2020 was:
£1.27bn
(31 December 2019: £1.05bn)
Full-year dividend
5.0p
(31 December 2019: 4.8p)
Total ongoing charges
1.8%
for the year to 31 December 2020: (31 December 2019: 1.6%)
Please refer to page 118 of the full annual report and accounts for further detail on the calculation of ongoing charges.
Top 20 investments as at 31 December 2020:
Representing 83% by value of HGT's investments
LTM sales growth
+22%
(31 December 2019: +24%)
LTM EBITDA growth
+31%
(31 December 2019: +35%)
EV to EBITDA multiple
22.1x
(31 December 2019: 19.8x)
Net debt to EBITDA ratio
6.4x
(31 December 2019: 6.2x)
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 46-47 of the full annual report and accounts .)
Balance sheet analysis as at 31 December 2020:
Liquid resources
(15% of NAV)
£188m
(31 December 2019: £189m)
HGT has an undrawn bank facility of £200 million.
Outstanding commitments
(50% of NAV)
£647m
(31 December 2019: £336m)
These commitments will be drawn down over the next four years (2021-25) and are likely to be financed partly by cash from future realisations. HGT can opt out of a new investment without penalty, should it not have the cash available to invest.
An active pipeline of investment opportunities led to new and follow-on investments, while returning cash to HGT through both realisations and refinancing.
Investment and realisation activity over the year:
Realisations for the benefit of HGT
£364m
Cash invested on behalf of HGT
£403m
Further information on all investments and realisations is provided on pages 50-56 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.
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One year % |
Three
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Five
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10
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20
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NAV per share* |
24.0 |
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19.7 |
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20.0 |
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13.5 |
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13.2 |
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Share price |
20.9 |
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22.7 |
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25.8 |
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14.8 |
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14.4 |
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FTSE All-Share Index |
(9.8) |
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(0.9) |
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5.1 |
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5.6 |
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4.6 |
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NAV per share performance relative to the FTSE All-Share Index |
33.8 |
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20.6 |
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14.9 |
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7.9 |
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8.6 |
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Share price performance relative to the FTSE All-Share Index |
30.7 |
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23.6 |
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20.7 |
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9.2 |
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9.8 |
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*Please refer to note 10(b) on page 94 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 2020 and allowing for all historic dividends being reinvested, an investment of £1,000 made 20 years ago would now be worth £14,799, a total return of 1,380% . An equivalent investment in the FTSE All-Share Index would be worth £2,463.
Long-term performance record
2011 £7m raised from subscription shares
2012 £36m raised from subscription shares
2013 £18m raised from subscription shares
2018 FTSE 250 Promotion to the FTSE 250
2019 10:1 10:1 share-split
2019 £75m equity raised
2020 £25m equity raised
Chairman's statement
"This last year has proven to be a uniquely challenging one with great difficulties, many hardships and sadly, for many, personal tragedy. Against this background, HGT has performed extremely well, as the resilience and attractiveness of the investment model and the underlying investments have been proven. While 2021 seems set to be a year of further challenges, HGT is well placed to continue the progress of recent years in what will hopefully be an improving climate."
Jim Strang, Chairman, HgCapital Trust plc
Dear shareholder,
This past year, I am sure, will be one which we will all be glad to see behind us. It brought extreme uncertainty, disruption, hardship and tragedy to many. For us all, it has proven a most challenging time. Hopefully, with a new year upon us and progress with the vaccine development, we may be able to return to some semblance of normality and start on a path to recovery from the COVID-19 pandemic. In that spirit, please allow me to pass on the best wishes of us all at HGT to our shareholders for the year ahead.
Despite these unprecedented times, I am pleased to report that HGT weathered this last year extremely well and delivered a very strong performance in 2020.
Highlights in 2020 included:
· 24% NAV per share growth, with net assets attaining a record level of £1.29 billion at 31 December 2020;
· 21% share price growth resulting in a market capitalisation of £1.27 billion at 31 December 2020;
· A total of £750 million committed to Hg funds, securing HGT's access to the Hg investment platform;
· A record £403 million of new and further investments by HGT into 15 businesses across the core investment clusters targeted by Hg;
· A record £364 million (net of carry) of proceeds returned to HGT, primarily from six realisations;
· A further strengthening of HGT's balance sheet through the issuance of new equity of £25 million and the formalisation of new and extended banking arrangements in the form of a £200 million revolving credit facility.
Performance
Despite the significant challenges which the year has brought, I am happy to report a very commendable performance from HGT. In 2020, the NAV per share of HGT increased from £2.55 to £3.10, an increase of 24.0% on a total return basis. The share price improved from £2.57 to £3.05, a total return of 20.9%. HGT benefited from strong fundamental business performance from the underlying portfolio companies, as well as the attractive stance which the stock market continues to take towards technology investments and, in particular, software.
We have long spoken of the resilient nature of the types of company held within the HGT portfolio, reflecting the investment positioning of the Manager - Hg. If ever there were an acid test of this feature, then the past year would have been just that. The portfolio performed well, with the underlying companies generating year-on-year growth of 22% in revenue terms and 31% in EBITDA. These businesses continue to trade successfully and, with their significant and predictable forward cash flows, are appropriately financed, with an average net debt-to-EBITDA ratio of 6.4x. Currently, only 3 of the total 36 companies held within the HGT portfolio are valued at less than their cost of acquisition, excluding the impact of currency movements.
Investments and realisations
Despite the obvious challenges to deal-making and the move to operating 'virtually', it is very pleasing to report that the flow of investments and exits continued throughout 2020.
The Hg investment model is built around deep knowledge and understanding of the dynamics of target investment clusters and the attractive companies within them. As many of these companies have long-standing engagements with Hg, this allowed the Hg deal team to continue to function effectively, despite having to pivot to a more 'virtual' way of operating. Furthermore, the reputation of Hg for building high-quality, market-leading businesses, with strong growth profiles, has allowed a series of lucrative exits to be achieved over the year.
HGT invested more than £400 million in 15 new and further investments in the year, including: Visma, Sovos, Septeo, Argus Media, P&I, Intelerad and CaseWare. All of these new portfolio investments share the characteristics of previous successful Hg investments. These new transactions are a result of long-term engagement with their respective management teams. Notably, the further investment in Visma, a leading provider of business-critical software to private and public enterprises in the Baltic, Benelux and Nordic regions, valued the business at US$12.2 billion and was the world's largest-ever software buyout.
For further information about new and further investments, please see pages 50 - 53 of the full annual report and accounts.
A key part of HGT's investment strategy is to make use of co-investments: investments directly into certain deals completed by Hg, as opposed to via a commitment to an Hg fund. Such co-investments allow HGT to manage its balance sheet in a more effective manner. Additionally, since these investments typically do not bear any management or performance fees, they reduce the total fee load on HGT. HGT recently agreed on a new co-investment framework with Hg which aims to allocate 10%-15% of HGT's balance sheet to co-investments in future. Currently, co-investments are valued at £80.2 million, representing 6.2% of NAV at 31 December 2020.
As regards realisations, the high-quality assets within the portfolio proved to be attractive acquisition targets for strategic acquirers and other private equity managers alike. Consequently, it was a very strong year for exits, with proceeds of £364 million (net of carry) delivered from six transactions. These included Visma, Sovos, The Citation Group, STP, Eucon and Evaluate.
The average multiple of cost achieved on exits, within the period, was an impressive 3.5x, with the average uplift to the last carrying value of those investments being 25%, reinforcing the rigour of the valuation process, but also the value which buyers placed on the quality assets within the portfolio.
For further information on realisations over the year, please see pages 54-56 of the full annual report and accounts.
New commitments
Shareholders will be familiar with the commitment-investment-realisation cycle which underpins the HGT investment model. Every three to four years, HGT and Hg's other institutional clients make commitments to invest in funds which seek to make investments over the following four to five years. HGT thereby enables shareholders to invest alongside the world's largest institutional investors in businesses which would otherwise be inaccessible to public market investors.
In 2020, HGT committed £750 million to new Hg funds across Hg Saturn 2, Hg Genesis 9 and Hg Mercury 3, ensuring that HGT can continue to participate in the investments made by Hg. Further detail on all commitments to Hg funds can be found on page 48 of the Manager's Review in the full annual report and accounts. Across all funds, HGT will continue to have the benefit of an 'opt-out' from the commitment to invest in any individual new transaction, if HGT does not have sufficient funds available; this feature, unique to HGT, is of considerable benefit to managing HGT's balance sheet efficiently.
Impact and responsible investment
While the pure financial returns of the year have been commendable, I would like to draw your attention to the continued and ever-increasing effort which your Board and the Manager, Hg, apply to how they do business. The Board of HGT and the Manager share a firmly held perspective that not only should the financial returns to you, the shareholders, be attractive, but these must be delivered in a manner which is consistent with our responsibility to society.
2020 has been a year when this focus on responsibility, sustainability and the overall commitment to ESG is more important than ever. As a technology investor, we understand the need to ensure that those businesses in which we invest reduce their carbon footprint and contribute to tackling climate change. During 2020, Hg was, itself, independently certified as a carbon-neutral company. I am pleased to report that the UNPRI assessment of Hg's approach to responsible investment has remained at AA++ during the year. The Board of HGT meets with the Hg responsible investment team to ensure that Hg's work is fully understood and endorsed by the Board.
In July 2020, Hg launched The Hg Foundation - a new charitable initiative to provide funding and operational support to schemes across Europe, the UK and the US - whose goal is to have an impact on the development of those skills most required for employment within the technology industry, focusing on individuals who may otherwise experience barriers to access this education. This foundation is funded by the Hg management company and its team members. For further information about this and the responsible investment focus at Hg, please see pages 39-41 of the Manager's Review in the full annual report and accounts.
Balance sheet
In 2020, with a new commitment programme established, the Board agreed on a new multi-currency revolving credit facility of £200 million, which is currently undrawn. This is in keeping with the level of these commitments and with optimising the balance sheet management of HGT.
Over the year, as shares in HGT have traded predominantly at a premium, HGT has taken the opportunity to increase balance sheet liquidity through a series of equity tap issuances, raising a further £25 million. This follows on from the successful raising of £75 million in 2019. When possible, the Board will continue to consider new equity issuance, providing that market conditions permit, offering existing and new investors the opportunity to subscribe and increase our equity base, while, at all times, bearing in mind our current shareholders' interests.
Dividend
Following the increase in the interim dividend from 1.8 pence to 2.0 pence per share in 2020, the Board is proposing a final dividend of 3.0 pence (subject to shareholder approval), making a total of 5.0 pence per share, as indicated in the interim report.
As noted previously, HGT aims to achieve growth in the net asset value per share and in the share price, rather than to achieve a specific level of dividend. Furthermore, the ability of HGT to pay dividends is very much influenced by the capital structures of the transactions entered into by the Manager and on income received on any liquid resources being held subject to investment.
Board and corporate governance
I am happy to report that your Board was able to operate successfully throughout this challenging year, switching rapidly to 'virtual' Board meetings and leveraging technology to ensure HGT's smooth running. I would like to extend my thanks to the many involved in ensuring that this all took place. The results of the annual Board effectiveness evaluation process show the Board to be operating well; however, we continue to strive for better and will endeavour to do so in the year ahead.
An important change to the governance of HGT over the reporting period took place in July as we welcomed a new colleague to the Board. After an extensive externally facilitated search process, Mrs Pilar Junco joined the Board of Directors, bringing the number of Directors back to a total of six. Pilar brings a wealth of relevant skills and knowledge to HGT from her career at Altamar Capital Partners, where she currently serves as Managing Partner, Chief Strategy and Chief Client Officer, and also from her tenure at Blackstone, where she served as a Senior Managing Director. Pilar's joining the Board brings a set of skills which is highly complementary to those of the rest of the Board and is in keeping with the skill-mapping exercise undertaken in 2019.
Valuation and risk
Over the course of 2020, the Board has more closely aligned HGT's risk management and valuation processes, to deepen the analysis of operational risk and further stress-test the valuation. An important element of this evolution has been to expand the remit of the Audit and Valuation Committee which is now named the Audit, Valuation and Risk Committee, which continues to be chaired by my Board colleague, Richard Brooman. The Board considers that an extensive and dynamic risk management framework is an important tool to underpin the creation of shareholder value, and to provide resilience against an increasingly volatile external environment.
I am happy to report that HGT continues to operate within the bands of this risk framework. As I have noted, to date, HGT has weathered the challenges of COVID-19. Furthermore, the prospect of Brexit, which figured prominently on the risk register last year, has not proven to have created any material difficulties for HGT.
The valuation of investments remains a key risk, given the elevated valuations which prevail in the sectors in which HGT invests. The Board and Hg regularly engage on the manner in which the valuations of underlying companies are set. Shareholders will be aware that HGT has increased the cadence with which valuations are communicated to the market, to improve the transparency of the valuations within the portfolio. Furthermore, the Board has worked alongside Hg to develop even more rigorous ways to triangulate different valuation methodologies to arrive at appropriate valuations for the portfolio's individual assets.
As a result, the Board considers that the valuation policy, which conforms with best-practice guidance from the industry body, IPEV, is robust. It is of further comfort that the appropriateness of valuations continues to be underpinned by values achieved in realisations. The average EBITDA valuation multiple for the top 20 investments (83% of the overall portfolio) at 31 December 2020 was 22.1x (19.8x at 31 December 2019). Further detail on the valuation environment can be found in the Manager's Outlook on page 57 of the full annual report and accounts.
HGT strategy
Over the course of the year, the Board spent considerable time and effort reviewing HGT's strategy. While HGT has enjoyed a period of sustained success over several years, this very fact prompted the Board to undertake a review, as the best time to undertake such a task is from a position of relative strength, such as HGT currently enjoys. I am happy to report that the results of this rigorous review outlined the validity, scalability and longevity of the investment strategy which HGT has adopted, along with the credentials and capability of the Manager, Hg, in being able to support it. As a result, HGT aims to follow a strategic path which is consistent with its historical one, retaining the investment focus and working with Hg to take advantage, selectively, of opportunities to grow which are consistent with those which have served HGT so well in the past.
Arrangements for the Annual General Meeting (AGM)
At the time of writing this Annual Report, the UK remains subject to strict regulations regarding meetings. The Board would normally welcome the AGM as an opportunity to present to shareholders and listen to your questions in person. However, given current circumstances, physical attendance at the AGM this year will not be possible. Arrangements will be made by HGT to ensure that the minimum number of shareholders required to form a quorum will attend the AGM in order that the meeting may proceed to discuss the formal business of the meeting only.
As shareholders will not be able to attend, alternative arrangements are being made to enable shareholders to see the AGM presentation which would otherwise have been given at the meeting by HGT's investment manager. This will be filmed and published on our website http://www.hgcapitaltrust.com in advance of the AGM. Should you wish to ask the Board or HGT's investment manager any questions, we request that you do so either by email to: HGTAGM2021@hgcapital.com, or by post, by writing to HGT at 2 More London Riverside, London, SE1 2AP. Questions submitted before 5 May 2021 will be answered ahead of the AGM, and we will endeavour to answer any questions subsequently received as soon as possible.
Given the above, we recommend that all shareholders vote by proxy in advance of the AGM, appointing me, as the Chair of the meeting, as their proxy. I urge you to submit your proxy votes in good time for the meeting. Further details of this year's AGM, including information on how to vote, can be found on pages 148 to 155 of the full annual report and accounts. I hope you will understand the approach we are taking this year, and we hope to see shareholders in person at next year's AGM.
Articles of Association
In order to provide the Board with greater flexibility going forward and to ensure shareholder participation in future AGMs, HGT is proposing that amended Articles of Association are adopted at the AGM this year. The principal amendments being proposed to the Articles of Association are to enable HGT to hold shareholder meetings using electronic means (as well as physical shareholder meetings or hybrid meetings). Although the new Articles would permit shareholder meetings to be conducted by electronic means, the Directors have no present intention of holding a virtual-only meeting, unless Government restrictions require them to do so.
Prospects
As I noted at the opening of my statement, current expectations are that, while 2021 will see its share of challenges, we shall also see some form of recovery from the COVID-19 pandemic and a gradual return to a more normal way of life. In this context, the prospects for HGT remain attractive. As 2020 has proven, not only are the assets within the portfolio resilient to exogenous shocks, but Hg is able to pursue its normal course of business in the cycle of acquiring and disposing of suitable investments, while generating attractive returns.
Your Board continues to take a positive view of the prospects for HGT. However, we maintain a clear focus on the many risks which prevail in the current environment.
Jim Strang
Chairman
12 March 2021
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 that it can add value through increasing organic growth, generating operational improvements, driving margin expansion, reorganisation or 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 invests primarily 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 to do so.
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 which 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 shareholders' 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 of the UK, predominantly in northern Europe, with a further part in businesses which 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 its 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, as 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 which 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.
Business model and risk framework
The Board has a clear view of the rationale for investing in unquoted businesses where the private equity ownership model has the potential to accelerate the growth in value creation. HGT seeks to capture this upside, whilst operating within a rigorous risk-management framework.
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, notably where there is the ability to work with management to implement strategic or operational improvements.
HGT offers a simple and liquid means by which shareholders can invest in unquoted growth companies, while benefiting from an investment company's governance model.
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 36 companies (as set out on page 58 of 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 118 of the full annual report and accounts. The Manager invests predominantly in unquoted software and business service companies in expanding sectors and provides portfolio management support. Hg's review below and on pages 25-81 of 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 which 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 similar terms.
HGT is usually the largest investor in each business. The Board has a further objective of keeping HGT as fully invested as is practicable, 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, should the need arise.
HGT may also take up a co-investment in some businesses (in addition to the investment which it has committed to make).
Typically, HGT has no liability to pay fees on such co-investment and no carried interest incentive is payable to the Manager on realisation (currently 6% 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 across all of the businesses in which it is invested as well as their valuation, the development of the Manager's investment strategy and 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 provided that 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 performance indicators, as set out above and on pages 5 and 6 of the full annual report and accounts. In the year to 31 December 2020, HGT's NAV per share increased by 24.0% on a total return basis. The FTSE All-Share Index decreased by 9.8% on a total return basis over the period. The annual total return of HGT's share price was 20.9%. NAV per share has grown by 13.5% p.a. compound over the last 10 years and 13.2% p.a. compound over the last 20 years. The share price has seen broadly similar performance growing by 14.8% p.a. compound over the last 10 years and 14.4% p.a. compound over the last 20 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 achieve any short-term performance relative to any index. The Board also compares HGT's NAV and share price performance versus other comparable indices with similar characteristics.
Dividends
The Board reviews HGT's dividend policy on a regular basis, taking into consideration feedback from shareholders and HGT's ability to pay dividends as its underlying investment structures continue to evolve. Currently, the Board anticipates being able to maintain a dividend of at least 5.0p per share, absent any change in underlying assumptions.
Going concern
HGT's business activities, together with those 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. 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 about 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 12 ‑ month period from the date of approval of this Report and to be able to meet its outstanding commitments. Accordingly, they continue to adopt the going concern basis in preparing these results.
Long-term viability statement
In accordance with provision 36 of the 2019 revision of the AIC Code of Corporate Governance, the Directors have assessed the prospects of HGT over a longer period than the 12 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 several factors, notably its outstanding investment commitments which, at year end, run until 2021-25. 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 2025.
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 pages 14 and 18 of the full annual report and accounts).
· the balance sheet, cash flow projections and availability of funding (below and on pages 47-48, 84 and 98 of the full annual report and accounts).
· HGT's contractual commitments (below and on page 104 of 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.
· The effect of Brexit on HGT and the portfolio companies.
Based on this assessment, the Directors of HGT confirm that they expect HGT to continue to operate and meet its liabilities, as they fall due, during the five years ending December 2025.
Principal and emerging risks and uncertainties
During 2020, the Audit, Valuation and Risk Committee (AVRC) 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 is achieved by defining HGT's risk appetite and managing risks within that appetite, particularly those which would threaten its business model, future performance, solvency, valuation, liquidity or reputation.
The Board has defined risk appetites for each risk category and subrisk. By assessing the impact and likelihood of each risk against appetite, focus is maintained on those risks which require most attention, with mitigating actions prioritised. This process involves the maintenance of a risk register which assesses each risk and classifies the likelihood of the risk and the potential impact of each risk on HGT. The AVRC regularly reviews the policies for managing each risk, as summarised below.
HGT considers its principal risks (as well as underlying risks) to be in four main categories:
Investment: The risk to HGT of an inappropriate investment strategy or Manager decisions leading to poor performance.
Financial: Valuation risk, liquidity risk and ensuring the availability of sufficient liquid resources for HGT to meet its commitments.
Operational: Regulation, Hg's internal systems and controls, portfolio performance and that of HGT's other service providers.
External: Macro-economic conditions, financial markets, changing regulation and other geopolitical uncertainties.
|
Potential risk |
Potential impact |
Mitigation |
Trend/Appetite |
|
|
|
|
|
|
Investment
|
|
|
|
|
Performance The underlying portfolio companies underperform. |
• 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.
|
Improving Within |
|
|
|
• Portfolio performance is reviewed regularly by Hg's Realisation Committee comprising experienced investment professionals and the HGT AVRC. • An operational performance group interacts across the portfolio to drive performance. |
Improving Within |
|
Financial |
|
|
|
|
Valuations In valuing its investments and publishing its NAV, HGT relies, to a significant extent, on the accuracy of financial and other information provided by the Manager. Inaccurate valuations would lead to a misleading NAV. |
• Creation of a false market in HGT shares • Reputation loss • Shareholders sellshares • Impact on liquidity and ability to raise equity |
• Valuations are prepared in accordance with IPEV guidelines and tested against HGT's Valuation Policy. • The Manager's Valuation Committee, independently chaired, reviews and approves valuations quarterly. • The auditors of both Hg funds and HGT review the valuation and methodology as part of their audit procedures. |
Improving Within |
|
Balance sheet The inability of HGT to make investments, owing to insufficient liquid resources available. |
• Reputation loss • Risk to future performance |
• Borrowing structures and cash flow forecasts are considered at each HGT Board meeting. • An additional £200m of liquidity is available through an undrawn bank facility. • An opt-out facility is available across all investing funds.
|
Improving Within |
|
Balance sheet Capacity is insufficient to underwrite future commitments to Hg funds. |
• Risk to future performance • Shareholders sell shares. |
• A bank facility is in place to facilitate orderly management of the balance sheet. • There is an opt-out facility across all investing funds.
|
Improving Within |
|
|
|
|
|
|
Operational |
|
|
|
|
Regulation It is in shareholders' interest to retain the tax advantages of investment trust status. |
• Increased corporation tax, leading to higher fees and potential impact on valuation and performance of HGT • Shareholders sell shares |
• The Manager monitors investment movements, forecast income and expenditure and retained income (if any) to ensure compliance with sections 1158 and 1159 of the CTA. • Continuing investment trust status is certified by the Manager at each meeting of the Board. |
Stable Within |
|
Regulation General changes in legislation, regulation or government policy could influence the decisions of investors.
|
• Misunderstood or misreported regulation leading to reduced demand for shares • Lack of adherence to regulation leading to reputational risk |
• Regular compliance and risk reviews are reported to the Board by the Manager's compliance team. • Strong shareholder engagement through: - dedicated investor relations team - corporate broker - company secretary. |
Stable Within |
|
Manager internal controls and processes The risk that the Manager's processes are not adequate leading to poor performance or non-compliance to regulation. |
• Reputation loss • Risk to future performance |
• The Manager is regulated and supervised by the FCA. • The Manager has controls in place, including those related to investment decisions; portfolio reviews; recruitment, training and promotions; financial performance and payments; protection of client assets; compliance; regulation. • The Board of HGT and its auditors regularly review these processes and controls. |
Improving Within |
|
Cyber security Cyber security and data loss risk at Hg and portfolio companies. |
• Loss of or lack of control over data due to cyber attacks • Reputation loss • Regulatory sanction |
• A portfolio cyber security team monitors cyber security across Hg and the portfolio companies and drives improvements. • Most recently, the GDPR Committee has successfully implemented mandatory training for all staff. |
Stable Outside |
|
External |
|
|
|
|
Political and macro-economic uncertainty Impacts from the UK leaving the EU affecting HGT and the portfolio companies in which it is invested. |
• Reduction in demand for shares |
• Hg's portfolio is diversified with a high degree of recurring revenue. • The Manager remains focused on the various issues which 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. |
Worsening Outside |
|
Foreign exchange Some Hg investments are denominated in other currencies, as well as sterling. |
• Valuations affected by foreign currency movements |
• The Board of HGT regularly monitors currency fluctuations. • The Hg treasury functions hedge currency exposure and actively mitigate currency risk where appropriate. |
Improving Within |
|
Global pandemic Operating and investment activities are disrupted by pandemic events. |
• Portfolio companies suffer revenue declines • Multiples of listed companies applied to valuations might be adversely affected
|
• Portfolio resilience is stress-tested against pandemic impacts. • The majority of revenues are derived from subscription-based recurring revenues for non-discretionary technology-led services. |
Stable Outside |
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 (pages 39-41 of the full annual report and accounts) and at www.hgcapital.com/responsibility. Hg'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 that it is 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 of its policies 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 of its functions to third-party providers. HGT has not, therefore, 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: www. hgcapital.com/wp-content/uploads/2020/08/Modern-Slavery-Act-2020.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 which the current members of the Board bring to HGT's leadership are described on pages 116 and 117 of 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 four men and two women. The Manager has an equal opportunities policy and currently employs 130 men and 97 women. Nic Humphries, Senior Partner, Hg, is a member of the Level 20 Advisory Council, a not-for-profit organisation which 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 on page 37 of the full annual report and accounts.
Directors' duties
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 which 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 and the impact which HGT has on the community and environment. They must take a long-term view of the consequences of their decisions, as well as aim to maintain a reputation for high standards of business conduct and fair treatment among the members of HGT.
The Directors of HGT have a duty to act in accordance with Section 172 of the Companies Act, the terms of which are shown above.
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 (when they first join the Board) with a tailored induction, including details of all relevant regulatory and legal duties as a Director of a UK public limited company. They 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, can seek independent professional advice. The schedule of Matters Reserved for the Board, as well as the terms of reference of its committees is reviewed annually and further describe Directors' responsibilities and obligations, including any statutory and regulatory duties.
Purpose
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 business service companies. In providing access to investments not otherwise usually available to its shareholders, 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.
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, with a paper reminding Directors of that being reviewed 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, including: assumptions around HGT's contractual commitments; availability of funding; borrowing; foreign currency management; wider economic conditions; market performance.
Operation of HGT
The Matters Reserved for the Board, Board committees' terms of reference, the Share Dealing and other Board policies are all reviewed at least annually, and the Directors ensure that they define obligations and correct procedures appropriately. The Report of the Audit, Valuations and Risk Committee, which can be found on pages 127-129 of the full annual report and accounts, further explains how the Committee reviews the risk management and internal controls of HGT. This includes ensuring 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.
Culture
Last year, the Directors also considered and defined HGT's culture, purpose and values and, in 2020, reconfirmed that this remained valid. 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.
The Directors 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.
The Directors recognise the value in sustaining a culture which contributes to achieving the purpose of HGT in a way which 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 of the Manager's 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, is 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.
· 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 in HGT's reports to shareholders and content disclosed on its website.
· Recognition of the quality of HGT's shares as an investment by the number of broker recommendations as a long-term hold.
Social responsibility
The Board recognises that HGT has a responsibility to its shareholders, stakeholders and the wider society. The Board endorses Hg's policy to invest HGT's funds in a socially responsible manner. This includes the desire that those businesses in which Hg invests are genuinely focused on making a positive contribution to all stakeholders including employees, customers, suppliers, shareholders and the wider society. 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 on page 39 of the full annual report and accounts.
Under listing rule 15.4.29(R), HGT, as a closed-ended investment fund, is exempt from complying with the Task Force on Climate-related Financial Disclosures; however, information on Hg's efforts on climate change can be found on page 41 of the full annual report and accounts. The Board and Hg recognise the impact which climate change has on the environment and society. The Manager is committed to measuring and managing the carbon emissions associated with its business operations, as well as the portfolio companies. Therefore, Hg 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 that it is compatible with the policy and receives periodic updates from the Manager on its initiatives and performance against its ESG goals. The Board last received an ESG presentation at its meeting in January 2021, which was given by Hg's Head of Responsible Investment. The Hg Responsible Investment Report 2019, Hg Responsible Investment Policy 2020 and Hg 2019/20 Carbon Footprint Report can be found on Hg's website: www.hgcapital.com/responsibility.
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 following table:
|
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.
|
HGT has 958 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 (AGM): HGT welcomes attendance and participation from shareholders at the AGM. If attending, shareholders have the opportunity to meet the Directors and ask questions at the AGM. The Board values the feedback and questions which it receives from shareholders. With the exception of 2020, the Manager delivers a presentation at the AGM. In 2021, in light of the ongoing pandemic, the usual presentation will be filmed and placed on HGT's website. For further information about the 2021 AGM, please refer to the Chairman's statement above. • Publications: The annual and interim results presentations, as well as quarterly reports and factsheets, are available on HGT's website, with their availability announced via the stock exchange. Feedback and/or questions which HGT receives from its shareholders enable HGT to evolve its reporting which, in turn, helps to deliver transparent and understandable updates. • Shareholder communication: The Manager communicates with shareholders periodically. During the period, the Manager has held over 50 meetings with current and potential investors including more than 300 people. All investors are offered the opportunity to meet the Chairman or other Board members. • 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 them 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. |
|
The Manager |
Holding HGT's shares offers
|
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 HGT's investment objective. The Board invites the Manager to attend all Board and certain Committee meetings in order to update the Directors on the performance of the investments and the implementation of HGT's investment strategy and 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 of 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 of 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. |
|
The Company Secretary,
|
In order to function as an investment trust with a premium listing on the London Stock Exchange, HGT relies on a diverse range of advisers 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. During the period, the Management Engagement Committee continued to undertake reviews of the third-party service providers and agreed that their continued appointment remained in the best interests of HGT and its shareholders. |
|
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 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 2020, 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. |
|
Regulators |
HGT can operate only with the approval of its regulators which 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, while being mindful of how any governance decisions which it makes can affect its shareholders and wider stakeholders, in the short and in the long term.
|
Principal Decisions in 2020
Examples of the Board's principal decisions during the year, how the Board fulfilled its duties under Section 172 of the Act and the related engagement activities are set out below:
|
Principal decision |
Long-term impact |
Stakeholder Considerations and Engagement |
|
To undertake a strategy review for HGT
|
Reviewing strategy and setting a clear strategic direction for HGT is key to the long term ability of the Company to deliver compelling returns to shareholders. |
The Board undertook a thorough strategy review exercise in 2020. The goals of this process were to understand and agree on suitable metrics to frame a long-term 'ambition' for the company; to validate the current investment model and its likely ability to continue to deliver returns to shareholders and to validate the capability of Hg in the role of investment manager. |
|
To make commitments into new Hg funds |
Commitments made, totalling £750 million across Hg Saturn 2, Hg Genesis 9 and Hg Mercury 3 funds, support the long term growth in the NAV of HGT and further strengthen the relationship with the manager, Hg. |
Consistent with its strategy and business model, HGT periodically enters into formal commitments to invest in certain investment vehicles raised by Hg. HGT is the largest such investor in these vehicles and shareholders benefit from the ability to deploy substantial capital in this manner in vehicles which would otherwise be inaccessible. Furthermore, HGT retains a unique 'opt-out' right associated with these investments which is further to the benefit of shareholders. |
|
To renew and extend HGT's credit facility
|
In line with its approach to
|
The Board regularly reviews HGT's cash position and commitments taking into consideration the impact on shareholders. The revised banking facility will be used to support the long-term growth of HGT, to help facilitate the programme of investments undertaken by HGT over the coming years. |
|
To issue new shares in HGT |
Issuing new shares allows HGT to increase its liquidity in the market - an important consideration for shareholders. Furthermore, successful investment of the capital raised in new issuances will promote further growth in HGT's NAV. |
The Board regularly reviews the capital structure of HGT and seeks to issue new equity when market conditions allow and where such action would, in the view of the Board, be in the best interests of HGT. When evaluating such decisions, the Board takes full account of the impact of any such capital raising on the existing shareholder base. The Board takes into consideration the ability of HGT to deploy any additional funds in a timely and successful manner. |
|
To make new appointments to the Board of HGT |
Continuing to develop and evolve the Board so that it contains an appropriate mix of skills, diversity and experience is important to promote the long-term success of HGT. |
During the year, two Board appointments were made. Namely the appointment of Pilar Junco as a member of the Board and the appointment of Jim Strang to the role of Chairman of the Board. These appointments were made to promote the best long-term interests of HGT, to bring requisite skills to the Board and in full compliance with HGT's policy on Board development and evolution. |
For and on behalf of the Board
Jim Strang
Chairman of the Board
12 March 2021
Extracts from Hg's review
Building businesses which change how we all do business
Hg is a specialist private equity investor focused on software and business service companies.
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, while 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, HGT Genesis 9 LP, HgCapital Mercury D LP ('Hg Mercury'), HGT Mercury 2 LP, HGT Saturn LP, HGT Saturn 2 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 6 E LP ('Hg 6 E'), in which HGT is a limited partner.
· direct investments in renewable energy fund limited partnerships (Asper Renewable Power Partners LP ('Asper RPP I 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 138-140 of 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 which change the way we all do business, through deep sector specialisation and dedicated, strategic and operational support.
Today, Hg has c.230 employees, representing the largest technology investment team in Europe.
We have three investment offices, which are in London, Munich and New York, with funds under management of around $30 billion and serving more than 150 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 focused primarily on defensive growth buyouts in software and business service companies operating in specific end-market 'clusters' with enterprise values ('EVs') of £100 million to over £10 billion, 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 that 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 over 30 software and business service companies with similar characteristics, but of different sizes, end-market focus and maturity profiles.
Hg's office in New York enhances 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 to consolidate Hg's position as Europe's leading software investor.
Hg Mercury
Lower mid market
EVs: £100m-£450m
Hg Genesis
Mid-market
EVs: £450m-£1.3bn
Hg Saturn
Large-cap
EVs focus: >£1.3bn
One strategy over three funds across the size range in software and business service companies
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 £100 million to over £10 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, sharing similar characteristics, yet differing 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 enable our businesses to benefit from being part of one larger organisation, while retaining their own identity with each management team, incentivised by their own success.
The Hg portfolio is not only the fastest-growing software business in Europe, but also the second-largest.
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 which 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 and diverse customer bases and which feature subscription-based business models generating predictable revenues and cash flows. With more than 30 software investments in our portfolio, we bring a unique set of networks and insights to help to support value creation in our businesses.
Tech-enabled services
Our business services investments focus on companies with high levels of intellectual property, large fragmented customer bases and 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 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
17+ years
TeamSystem, Visma, Iris, Sovos, Azets, Silverfin, Prophix, CaseWare, Gen II
ERP & Payroll
17+ years
TeamSystem, Visma, Iris, Access, Transporeon, P&I, BrightPay, Benevity
Legal & Regulatory Compliance
14+ years
Achilles, TraceOne, Mitratech, Litera, Septeo
Automotive
12+ years
MeinAuto
SME Tech & Services
11+ years
Commify, IT Relation, team.blue, Register, F24, Geomatikk, The Citation Group
Capital Markets & Wealth Management IT
7+ years
FE Fundinfo, Argus, SmartTrade
Insurance
7+ years
GGW Holding, Howden Group
Healthcare IT
6+ years
Evaluate, Allocate, Medifox, Lyniate, Intelerad
Note: Number of years refers to the number of years for which Hg has invested in each cluster
Working together
Sharing Hg know-how and experience
By virtue of the fact that Hg invests repeatedly 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 which is key to performance in an 'Hg sweet ‑ spot' business model: growth, transformation, technology, cyber security, data analytics, ESG and talent. For each of these levers, the portfolio team has the experience and deep knowledge of best practices to help to drive value creation, in collaboration with management.
Every company can access the team, yet the nature of support can take a variety of forms. Often, our portfolio team members provide direct support, taking on roles to help the business to pursue growth more quickly. Another option is for our experienced industry experts to mentor senior executives, helping them to 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.
"What's been remarkable is how the connectivity has increased across the Hg portfolio of companies. Everyone's in it together. There has also been a notable increase in the speed at which innovation and positive change is taking place. I've been so impressed with the rate at which our companies have adapted to, and made the most of, this new environment we find ourselves in."
Dawn Marriott, Partner and Head of Portfolio Team, Hg
Our focus areas
From sharing best practice and resources through to tailored teams of technical experts, we work closely with the companies in which we invest to ensure that they gain the tools and guidance required for business success.
· Technology & Cybersecurity
· ESG
· Talent
· Growth
· Data Analytics
· Transformation
For further information, please visit : hgcapital.com/working-together
The Hg portfolio community
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 in which 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 and insights and to share best practice and learnings with others in the Hg portfolio and our network of external experts. In 2020, we offered portfolio companies a full end ‑ to ‑ end digital engagement experience, hosting virtual events and facilitating an increase in activity on the Hg online collaboration platform - Hive. In total, we hosted over 75 online events, with 1,500 attending.
Virtual events
From March 2020, to ensure we were engaging with our portfolio and creating multiple touch points, we used the Hive platform and hosted a number of tailored webinars for our portfolio contacts. In August 2020, Hg then partnered with Welcome, a virtual event platform which enables the creation of high-quality events, thereby creating a truly differentiated experience for those attending. Since September 2020, Hg has partnered with Welcome to successfully host five virtual summits and three tailored virtual roundtables, with NPS scores of over 80% being obtained. Hg can attribute this success to not only a combination of hitting the right tone with the format and relevant content, but also the creation of a tailor-made dedicated experience for each person attending.
75 Portfolio team-led online events, with many more in the diary
1,500 total in attendance
Hive - Hg's online community for everyday collaboration
Hive is Hg's online collaboration platform. It connects thousands of senior executives across the Hg portfolio through multiple functional communities. Individuals can post questions, start discussions, share content and gain access to best ‑ practice methodologies from world ‑ class experts. With digital engagement being the most utilised format to engage with our portfolio through the pandemic, Hive is thriving more than ever. In 2020, we welcomed 800 new members, with over 22,000 interactions captured across the year. This highlighted a 689% increase in total usage by our members. With this huge increase in members, several developments are being implemented across the Hive platform to further enhance collaboration and engagement.
>95% members are from our portfolio companies
27 live communities
>2,500 active members and growing!
For further information, please visit : hive.hgcapital.com
Our team
c.230 members of the team
3 investment offices in London, Munich and New York
140 investment and portfolio management executives
8 clusters of expertise
"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
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 - in both investment selection and portfolio management - requires significant resources, and we have built a business employing c.230 people, including 140 investment and portfolio management executives and other professionals. Our investment and portfolio-management executives come from a range of backgrounds and experience, including private equity, consulting, investment banking, accounting and industry specialists. Our portfolio team comprises a mix of senior operators and functional specialists, typically with substantial 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 16 European countries, Asia, Africa and the USA. On average, our partners have 15 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. These - along with our strong brand, leadership, sector focus, fund performance, vibrant culture and only working with recruitment partners who ensure that their search methodology is inclusive, providing diverse talent - allow 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 this to be 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 that 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, providing 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 those behaviours which 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. We know that longevity of success means doing it the right way, thinking long term and always being willing to listen and learn. These values can be seen and felt everywhere you look, around our offices and in everyday interactions - it's really what makes us Hg.
A description of Hg's key staff is available at : hgcapital.com/our-people
"With diversity, you source and analyse deals, ask and answer questions and manage teams differently. It adds up to better investment and business decisions. The more complex the challenge at hand, the greater the returns."
Nic Humphries, Senior Partner, Hg
Diversity and inclusion
Hg has introduced several new policies, over the past 12 months, as part of a wider initiative around diversity and inclusion. We have an established D&I steering group, comprising a range of individuals from across the firm. Its aim is to promote a culture of inclusion which clearly values diversity in all of its forms. We have several global initiatives - gender balance, flexible working, mentoring programmes, training and awareness events - to drive internal change. This is also echoed and supported through our HR learning and development initiatives, including structured mentoring programmes, recruitment processes and training, embedding awareness of unconscious bias and inclusion.
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. Hg senior partner Nic Humphries continues his role on Level 20's advisory council.
Hg has also signed up to new and exciting programmes, including the Institutional Limited Partners Association's 'diversity in action' initiative, acknowledging our ongoing commitment to take concrete steps to advance diversity, equity and inclusion across our organisation and the industry more broadly. In addition, we look forward to welcoming our first interns through the #100blackinterns programme, helping black students to kick-start their career in investment management.
In October, Hg were proud to sponsor the PEI 'Women in PE' Forum, featuring a keynote from Nic Humphries on 'Working to create a diverse and inclusive environment' and Elizabeth Wallace and Martina Sanow hosting the workshop 'Women and Diversity: what does it mean?' alongside Pamela and Dorett Jones of Genesis Consultancy. This workshop pushed attendees to consider where we are today on gender parity and identify where there are still gaps.
Hg is now a member of the LGBT Great network and as part of this partnership has contributed to two of their research projects: LGBT+ investing lens: research exploring the practice of investing for financial return while also considering the benefits to those who identify as LGBT+, such as improving economic opportunities or social inclusion for the LGBT+ community.
Diversity Data: research exploring the concept of extending mandatory organisational diversity reporting beyond gender to other diversity dimensions such as ethnicity and sexuality.
Hg hopes that this research will be a catalyst for positive change and are proud to be a part of it.
"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, Partner and Deputy Chief Operating Officer, Hg
Removing barriers to education & skills in technology
The Hg Foundation
The Hg Foundation's goal is to have an impact on the development of those skills most required for employment within the technology industry, focusing on individuals who may otherwise experience barriers to access this education.
The foundation aims to achieve this by providing funding and operational support to charitable schemes across Europe, the UK and US, where its long-term, measurable and scalable impact can be demonstrated to make a difference to those who need it most.
Since its launch in 2020, the foundation has formed three key strategic partnerships, representing an initial total commitment of £2.3 million, to be delivered over the first three years.
Alongside Imperial College London , a global top-10 university, the foundation has committed funding to advance and scale the college's current mA*ths outreach programme to incorporate A-level further maths, supporting the development of a skill critical to employment within technology.
The SEO Tech Developer programme in the US addresses the technology diversity gap for black, Latinx and native American undergraduate students majoring in computer science, engineering and related STEM fields.
The foundation was one of the initial funders of an online tutoring pilot commissioned in spring 2020 by Impetus , the EEF, Nesta and The Sutton Trust, the findings of which fed into the National Tutoring Programme (NTP) rolled out later in 2020 by the UK Government.
Through The Tutor Trust , an established tutoring charity and delivery partner of the NTP pilot, the foundation is supporting a further pilot initiative to test the efficacy of a hybrid model of online and face-to-face tutoring for disadvantaged students.
The foundation is funded through a proportion of carried interest from current and future Hg funds, a proportion of Hg's annual profits and also through charitable activities carried out across the firm. The foundation's ambition is to reach £3-4 million annual commitments over the first 10 years.
The Hg Foundation is a UK-registered charity, run by an independent board of trustees, including Tom Attwood (chair) and Sir Kevan Collins. Tom Attwood is the former chair of the Academy and Free School Board at the DfE. Sir Kevan Collins was the first chief executive of The Education Endowment Foundation, during 2011-19, and is a visiting professor at the UCL Institute of Education.
For more information, please visit the Hg Foundation website: www.thehgfoundation.com
Responsible investment
Why responsible investment 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, while generating superior risk ‑ adjusted returns for the millions of pensioners and savers globally whose funds are invested with Hg. We want the businesses in which we invest 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 to generate superior long ‑ term performance.
Our responsible investment journey
We continue to demonstrate our commitment to RI publicly - through our relationship with the United Nations ‑ supported principles for responsible investment (UNPRI). We have been signatories since 2012 and are proud to have retained the top score, AA++, for a second successive year, cementing our reputation as a leader in ESG initiatives and innovation.
We recognise that climate change is one of the most important topics in the ESG space and at the top of the agenda for society, Hg and our investors, especially with the forthcoming COP26 conference. As a result, Hg joined the UK network of the Initiative Climat International (iCI) as a founding member in 2020. This European initiative on climate change was created recognising that climate change will have an adverse effect on the global economy. It is supported by the UNPRI and the UK network comprises a collaborative network of over 20 Private Equity firms who are all working towards best practices for carbon footprinting and climate change.
As part of our efforts on climate change, Hg has undertaken a full climate change risk assessment across our portfolio, using our PwC ‑ developed climate change risk tool. This concludes that none of Hg's businesses faces high transition or physical risk relating to its operations. As a result of our comprehensive review, we have practical opportunities to reduce risks and increase resilience, both within Hg and across the portfolio. Hg has been recertified as carbon neutral - our FY 2019/20 carbon footprint report (see page 41 in the full annual report and accounts ) shows Hg's value chain carbon footprint and what we have done to offset our emissions. Our planned carbon-reduction strategy will set targets and identify opportunities to further reduce our carbon emissions, helping Hg to transform our environmental impact. Since March 2020, the COVID ‑ 19 pandemic has presented challenges to both Hg and our portfolio - and we have been quick to act. For details about how Hg and our portfolio responded to the pandemic, please see pages 42-43 in the full annual report and accounts .
ESG in the deal process
ESG is embedded into the entire deal process, from screening to exit. We are very clear, as outlined in our exclusion list, on the types of business in which we do not invest. During due diligence, we assess companies for compliance with relevant laws in relation to ESG, H&S, bribery and corruption.
We also consider the inherent ESG risk of the company and carry out an associated review, detailing risks and opportunities in relation to our sustainable business framework (see page 40 in the full annual report and accounts ), taking an active approach to managing ESG during our ownership.
This starts with an onboarding and maturity assessment, within the first months of acquisition, to identify areas for ESG improvement where Hg can support the companies to realise their ambitions within, and beyond, our sustainable business framework. As part of our ongoing responsible business engagement, each business is reassessed annually with regular follow-ups to ensure that appropriate actions are taken to improve, as required.
In 2020, we conducted our third ESG assessment of our portfolio companies, all of which have been assigned a score of 0-10. This assessment is made against our sustainable business framework. We are delighted to report that the average score across the portfolio is eight, with an average improvement of 22%, compared with the first time assessed three years ago (or more recently, depending on when each company joined the Hg family). This reassures us that the ESG interaction and support to our portfolio companies helps to increase performance in this space. Our target is, by the second year of assessment, to increase all companies' scores to at least eight.
PRI
A signatory to the UNPRI since 2012.
AA++ 2020 PRI assessment score:
'A+' for strategy and governance and
'A+' for private equity ownership
Our sustainable business framework
Hg's sustainable business framework outlines key ESG areas of focus for software and service companies. This framework is based on extensive research and forms the foundation for the ESG assessments which we conduct of our businesses as part of onboarding - and annually thereafter.
Essentials
There are certain minimum ESG requirements which Hg expects from all of our businesses. These include:
· Governance and business integrity , such as a company code of conduct, appropriate controls, board composition and appropriate health & safety, whistle-blowing and grievance procedures;
· Legal, compliance and risk , including compliance functions and active risk management, as well as standards and policies to combat bribery, corruption, money ‑ laundering, anticompetitive behaviour and other malpractice;
· Data and cyber security , including 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 is our 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;
· Growing businesses and talent , including job growth, healthy staff turnover, talent management and succession ‑ planning;
· Engagement and motivation by promoting transparent communications, health and well ‑ being, learning opportunities, recognition and good leadership;
· Diversity of talent and equal opportunities, irrespective of ethnicity, gender, disability or background.
Society
We want all of 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 affect society in several ways:
· Community engagement , including apprenticeships, charitable giving and volunteering;
· Environmental impact , such as energy use, carbon footprint, 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 visit: www. hgcapital.com/responsibility
To watch our R esponsible I nvest ment video, please visit: www. hgcapital.com/responsibility
Certified Carbon Neutral Company
CarbonNeutral.com
Hg has been recertified as a carbon-neutral company and continues to offset all carbon emissions. With greater transparency, more accurate data and a new carbon-reduction strategy for 2020/21, we are making environmental responsibility a crucial part of the way in which we do business.
In the past year, we have focused on reducing our emissions in our office utilities and are proud to report good progress. Our water emissions have dropped by two ‑ thirds, while both our electricity and mains gas emissions have also reduced significantly. However, our business has grown, too. In 2019/20, Hg's headcount increased by around 25%, while, in April 2019, we opened our New York office - both factors contributing to an increase in our office ‑ related emissions, business travel, hotel stays and staff commuting. With this in mind, we are creating a carbon-reduction and management strategy for 2020/21, with the aim of reducing our footprint across all areas over the next 12 months. In particular, we are examining how we can learn lessons from the new working practices introduced during the COVID ‑ 19 pandemic and translate them into long ‑ term policies which will help to transform our environmental impact.
The issue
In 1994, the United Nations Framework Convention on Climate Change recognised that the climate system can be affected by greenhouse gas (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, chlorofluorocarbon (CFC), hydrochlorofluorocarbon (HCFC) and hydrofluorocarbon (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 reradiate this energy as heat within the Earth's atmosphere. Unless we take radical action, our lives (including our resources, economies and businesses) are going to be profoundly affected. Hg is taking very seriously indeed our responsibility to be part of that action. By measuring and offsetting our carbon footprint, we aim to do our part in tackling the global climate emergency, while also supporting sustainable development in local communities. We strive to lead by example and are working actively with our portfolio companies to raise awareness and support urgent positive change.
Methodology
This report outlines Hg's carbon footprint for the financial year 2019/20. It has been prepared by external consultant Natural Capital Partners and includes our scope-one, -two and -three emissions.
Premises:
These include mains gas and electricity consumption, transmission and distribution losses, water consumption and waste water leaving 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 couriers' deliveries.
|
|
GHG Emissions (tCO2e) |
|||
|
2019/2020 |
2018/2019 |
Y-o-Y Change |
||
|
Refrigerant gas |
1.9 |
0 |
1.9 |
|
|
Mains gas |
35.9 |
50.7 |
-14.8 |
|
|
Electricity Inc. T&D losses |
128.0 |
210.7 |
-82.7 |
|
|
Water and wastewater |
2.0 |
6.1 |
-4.1 |
|
|
Waste |
1.6 |
0.7 |
0.9 |
|
|
Business travel |
1,973.0 |
1345.7 |
+627.3 |
|
|
Hotel stays |
38.2 |
19.3 |
+18.9 |
|
|
Staff commuting |
63.9 |
21.8 |
+42.1 |
|
|
Outbound courier deliveries |
4.6 |
0.7 |
3.9 |
|
|
Total |
2,249.1 |
1,655.7 |
|
+593.4 |
|
Emissions Metrics |
|
|
|
|
|
Emissions / FTE |
11.42 |
10.28 |
+1.14 |
|
|
Emissions / m2 |
0.68 |
0.60 |
+0.08 |
|
Offset and reduction
Hg continues to offset all carbon emissions by supporting the Acre Amazonian Rainforest project. This prevents deforestation and promotes sustainable economic livelihoods in the Brazilian Amazon1.
With the funds of carbon finance, the project works 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:
· No poverty
· Zero hunger
· Good health and well-being
· Life on land
1 https://www.naturalcapitalpartners.com/projects/project/acre-amazonian-rainforest-conservation
COVID-19 update:
Resources and information from across the Hg portfolio
With the COVID-19 pandemic affecting every aspect of business and society, Hg is pleased to have seen the businesses which we back providing the efficiency tools and expertise to help their customers to best navigate this unique crisis and, in some cases, actively help our frontline carers to combat the impact of the virus. There have been some impressive and often critical efforts all round - and we are proud to present a few of these.
Link to full webpage: www.hgcapital.com/covid-19-update-resources-and-information-from-across-the-hg-portfolio
Allocate
In 2020, Allocate, a leading international provider of workforce- and resource-planning solutions, was deployed to help solve staffing issues at several of the UK's dedicated COVID-19 field hospitals, with Allocate's HealthRoster Optima software being used to e-roster staff. The SaaS solution was deployed in just nine days at London Excel and was prepared to deliver rostering for up to 30,000 staff at the 4,000-bed field hospital. The Allocate team have been ready to provide 24/7 operational roster management both onsite and remotely - putting on significant extra staff to handle the system. Hg has also assigned over 20 of their own employees to help manage the rostering support centre which was set up to help nurses, physicians and other medical staff to manage their shifts. Allocate responded to a further 7 field hospital requests in the UK and had other discussions in Germany and Australia.
Evaluate
In 2020, Evaluate, a leading provider of commercial intelligence and predictive analytics to the pharmaceutical industry, co-hosted a virtual conference to bring together the life sciences industry to support the fight against COVID-19. With physical conferences impossible, #PartneringAgainstCOVID19 was a unique, virtual event, aimed at accelerating the industry's ability to find the right partner in developing diagnostics, drug treatments and a COVID-19 vaccine. 3,200 participants from over 80 countries and representing more than 2,140 life science companies came together, resulting in over 2,600 partnering meetings in just three days.
Intelerad
In 2020, Intelerad, a leading global provider of medical imaging software and enterprise workflow solutions, committed to providing the radiology community with technology which makes a difference and information which really matters to its sector during the pandemic. The podcast series, Rallying Against COVID-19, brings in experts and external guests to discuss hot topics, including remote readings tips, innovative solutions to the COVID-19 challenges and more.
The Citation Group
The Citation Group ('Citation') provides tech-enabled compliance and quality-related subscription services to SMEs across the UK. During this crisis, Citation is helping over 40,000 SMEs in the UK to navigate the HR and H&S issues related to COVID-19. Citation's experts have also created an online hub and back-to-business toolkit for the next phase of lockdown. Both are updated with the latest government measures in the fight against the disease, including live Q&A sessions with experts.
Transporeon
Transporeon is a cloud-based logistics platform with strong network effects, connecting over 1,200 shippers and almost 100,000 carriers worldwide. Transporeon has developed an amazing online resource, including real-time cross-border traffic-tracking, to help to navigate the logistics industry during the COVID-19 pandemic.
F24
F24, the pan European leading SaaS provider for proactive crisis management, emergency notification and critical communications, supports its more than 2,500 customers in managing critical communication and processes during the pandemic.
With FACT24, F24 provides its customers a secure and reliable platform for emergency notification and crisis management to handle the COVID-19 pandemic. In addition, F24 created a smart and simple method for recording and tracing personal contacts with its business messaging service eCall very quickly after the pandemic started. The solution is based on SMS and works without an app, which means it is very easy to access for everyone, e.g. in restaurants, shops or for companies to enable tracing of their employees' personal contacts within the work environment.
Litera
Litera is offering Litera Transact free during the crisis, helping legal teams to carry out several processes online, allowing them to work, while reducing the need for, and risk of, physical contact.
Visma
Admincontrol (Visma) is offering its online portal products free, during this challenging time, to enable businesses to communicate through a secure and encrypted platform.
Azets (formerly CogitalGroup)
Blick Rothenberg: (Azets) has created an up-to-date guidance hub, with advice on tax, contracts, government schemes and cash flow management, among many other topics.
smartTrade
smartTrade have dedicated specific hardware to assist in the C19 research of Folding@Home, a distributed computing project for simulating protein dynamics behind many diseases to help understand better the virus and, ultimately, to find a viable treatment.
Medifox
The Medifox Connect product is free for six months, at a time when visiting family in nursing homes or with home care isn't easy. Using its family portal, relatives can easily exchange personal messages, pictures and videos with loved-ones.
Sovos
Sovos offered free filing support at the start of the crisis and ran a live blog in the spring and summer of COVID-related tax regulation changes around the world. Changes since are reported on their regulatory analysis feed by their global team of tax attorneys and analysts.
IRIS
IRIS has been updating its blog hub with practical advice on HR, compliance, payroll and accounting for businesses. It launched a free business-to-employee comms tool to help HR teams to engage simply and securely with staff during COVID-19 isolation.
team.blue
team.blue helps over 2 million SMEs across Europe to create and maintain their digital presence. This has proven crucial in keeping businesses moving during the COVID-19 pandemic. The firm's Italian division, Register, has been particularly active - also donating actively to heavily affected Italian regions.
Commify
Commify has been offering free SMS messaging to healthcare providers to make emergency communications easier.
EidosMedia
The speedy deployment of EidosMedia's mobile newsroom app has enabled news rooms to work remotely during the crisis. EidosMedia has also been fundraising in its Milan office, collecting and donating around €13,000 to CESVI for Bergamo's Hospital Giovanni XXIII.
Mitratech
Mitratech has been rolling out new workflows, free of charge, for TAP Workflow Automation clients, helping clients to manage the new world, including self-reporting COVID-19 cases, a remote-work tracker and travel approval requests.
Achilles
Achilles has built an action plan for buyers needing better supply-chain visibility during the crisis and beyond. Achilles has also created a COVID-19 resource centre and partnered with leading law firm Schjødt - to offer customers free initial consultation on new legislation.
Lyniate
Lyniate partnered with Nova Scotia Health Authority to facilitate faster delivery of negative C19 test results. Lyniate's products can be used to enable workers to be screened to ensure a safe return to work and report the results to the Centers for Disease Control & Prevention for analysis and action. Drew Ivan, Chief Product and Strategy Officer, also wrote about facilitating the vaccine rollout.
Access Group
Access Group regularly updates their COVID-19 information hubs for companies in sectors including Health & Social Care, Hospitality and Not-for-profit. Practical guides, virtual events and blogs offer support for their customers' fast adapting business models. The Access EarlyPay app gives employees access to earned pay as and when they need it, which reduces staff financial pressure, resulting in reductions in staff turnover.
FE fundinfo
FE fundinfo provided free training for Financial Advisers using their FE Analytics tool, to help them advise investors during the financial market turbulence seen as a result of the pandemic. 1,700 Advisers were trained on how to use FE Analytics more effectively to give informed investment advice to their clients.
Year in review
Net asset value (NAV)
During the year, the NAV of HGT increased by £252 million, from £1,039 million at 31 December 2019 to £1,291 million at 31 December 2020.
Attribution analysis of movements in NAV
|
|
Revenue
|
Capital
|
Total
|
|
Opening NAV as at 1 January 2020 |
23,536 |
1,015,762 |
1,039,298 |
|
Realised capital and income proceeds from investment portfolio in excess of 31 December 2019 book value |
4,713 |
100,334 |
105,047 |
|
Net unrealised capital and income appreciation of investment portfolio |
30,012 |
195,054 |
225,066 |
|
Net realised and unrealised gains from liquid resources |
1,395 |
103 |
1,498 |
|
Share issue |
- |
25,162 |
25,162 |
|
Dividend paid |
(20,399) |
- |
(20,399) |
|
Expenditure |
(7,871) |
(1,536) |
(9,407) |
|
Taxation |
(2) |
- |
(2) |
|
Investment management costs: |
|
|
|
|
Priority profit share - current year paid |
(14,614) |
- |
(14,614) |
|
Priority profit share - reallocation between capital and income |
3,176 |
(3,176) |
- |
|
Carried interest - current year paid |
- |
(37,204) |
(37,204) |
|
Carried interest - current year provision |
- |
(23,429) |
(23,429) |
|
Closing NAV as at 31 December 2020 |
19,946 |
1,271,070 |
1,291,016 |
Analysis of NAV movements
Several underlying factors contributed to the increase in NAV. Positive impacts were the £225.1 million revaluation of the unquoted portfolio and uplifts of £105.0 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 £25.2 million.
Reductions in NAV included: the payment of £20.4 million of dividends to shareholders, carried interest paid of £37.2 million and a £23.4 million increase in the provision for future carried interest.
Attribution analysis of movements in the value of investments
During the year, the value of the unrealised investments increased by £228.8 million, before the provision for carried interest. The majority of the increase, £284.5 million, relates to increases from profit growth in the underlying investments. An increase in valuation multiples increased the value of investments by £33.2 million.
Acquisitions net of realisations at carrying value of £107.2 million increased the value further. Unfavourable currency movements of £23.4 million and an increase in net debt of £64.8 million contributed negatively to the unrealised portfolio.
Top 20 portfolio trading performance as at 31 December 2020
The top 20 investments (representing 83% of total investments by value) have delivered strong sales growth of 22% and EBITDA growth of 31% over the last 12 months ('LTM').
The business model characteristics of the companies in which we are invested give us confidence that sustainable growth can be achieved consistently, going forward.
More than 70% by value of the top 20 businesses within the portfolio are seeing double-digit revenue growth, and more than 90% have delivered double-digit EBITDA growth over the last 12 months.
Profits have grown at a faster rate than revenues, with continued investment made into the cost base of several companies, for example, to finance increased sales and marketing capabilities and strengthen management and new product development, continuing to drive future performance.
We have seen very robust and consistent trading performance from the majority of the portfolio, with particularly strong growth from Mitratech, Allocate, Access, IT Relation, Intelerad, Visma and FE fundinfo. Whilst new to the portfolio, Septeo is also displaying robust growth.
Where a company has not performed as well as we would like, we have reflected this in its valuation. During 2020, we took the decision to write down EidosMedia.
Overall, continued robust earnings growth and strong cash generation continue to drive equity value in our investments.
Distribution of top 20 LTM sales growth: +22%
|
Sales growth |
LTM |
Number of investments |
% of top 20 |
|
<10% p.a. |
1,272 |
6 |
26% |
|
10% to <15% p.a. |
418 |
6 |
23% |
|
15% to <25% p.a. |
902 |
6 |
23% |
|
>25% p.a. |
1,929 |
2 |
28% |
Distribution of top 20 LTM EBITDA growth: +31%
|
EBITDA growth |
LTM EBITDA |
Number of investments |
% of top 20 |
|
<10% p.a. |
94 |
2 |
6% |
|
10% to <20% p.a. |
352 |
6 |
27% |
|
20% to <30% p.a. |
260 |
4 |
20% |
|
>30% p.a. |
763 |
8 |
47% |
Valuation and net debt analysis as at 31 December 2020
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 22.1x (19.8x at 31 December 2019). We have made incremental improvements to our methodology during the year in order to add further rigour to our valuations. These include the use of multiple valuation techniques as a cross-check to the existing valuation methodology and expanding the number of comparable businesses used to calculate the multiples for each individual investment.
There remains an ongoing 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.
The basis of the approach continues to be to apply a relevant multiple to a suitable earnings-based performance metric. We 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 2020, 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 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 6.4x LTM EBITDA (6.2x at 31 December 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 EV to EBITDA valuation multiples: 22.1x
|
EV to EBITDA |
LTM EBITDA |
Number of investments |
% of top 20 |
|
<15.0x |
211 |
3 |
10% |
|
15.0x to <20.0x |
135 |
4 |
12% |
|
20.0x to <23.0x |
830 |
6 |
47% |
|
23.0x to <25.0x |
72 |
3 |
11% |
Distribution of net debt to EBITDA ratios: 6.4x
|
Debt to EBITDA |
Debt |
Number of investments |
% of top 20 |
|
<4.0x |
1,921 |
3 |
23% |
|
4.0x to <6.0x |
466 |
4 |
12% |
|
6.0x to <7.0x |
1,996 |
5 |
20% |
|
7.0x to <9.0x |
3,549 |
7 |
39% |
Outstanding commitments of HGT
At 31 December 2020, HGT held liquid resources of £188 million and had outstanding commitments of £647 million, as listed below. We anticipate the majority of these outstanding commitments will be drawn down over the next three to four years (2021-25) and are likely to be partly financed by cash flows from future realisations. 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. HGT also has access to an £200 million bank facility which was undrawn as at 31 December 2020.
|
Fund |
Fund vintage |
Original commitment £million |
1
|
Outstanding commitments as at 31 December 2020 |
Outstanding commitments as at 31 December 2019 |
||||
|
£million |
% of NAV |
£million |
% of NAV |
||||||
|
HGT Genesis 9 LP |
2020 |
322.2 |
2 |
263.2 |
20.4 |
|
- |
- |
|
|
HGT Saturn 2 LP |
2020 |
292.6 |
3 |
200.6 |
15.5 |
|
- |
- |
|
|
HGT Mercury 3 LP |
2020 |
102.9 |
4 |
102.9 |
8.0 |
|
- |
- |
|
|
HGT Transition Capital LP |
2018 |
75.0 |
|
49.6 |
3.8 |
|
59.1 |
5.7 |
|
|
HGT 8 LP |
2018 |
350.0 |
|
9.7 |
0.8 |
|
143.5 |
13.8 |
|
|
HGT Saturn LP |
2018 |
150.0 |
|
7.9 |
0.6 |
|
69.3 |
6.7 |
|
|
HGT Mercury 2 LP |
2017 |
80.0 |
|
4.7 |
0.4 |
|
36.7 |
3.5 |
|
|
HgCapital Mercury D LP |
2011 |
60.0 |
|
3.3 |
0.3 |
|
3.3 |
0.3 |
|
|
HGT 6 LP |
2009 |
285.0 |
|
2.3 |
0.2 |
|
2.4 |
0.3 |
|
|
HGT LP |
pre-2009 |
120.0 |
|
1.3 |
0.1 |
|
1.3 |
0.1 |
|
|
HGT 7 LP |
2013 |
200.0 |
|
1.2 |
0.1 |
|
20.0 |
1.9 |
|
|
Asper RPP I LP |
2006 |
19.4 |
5 |
0.6 |
- |
|
0.6 |
0.1 |
|
|
Hg 6 E LP |
2009 |
15.0 |
6 |
0.1 |
- |
|
0.1 |
- |
|
|
Total |
|
|
|
647.4 |
50.2 |
|
336.3 |
32.4 |
|
|
Liquid resources |
|
|
|
187.6 |
14.5 |
|
189.3 |
18.2 |
|
|
Net outstanding commitments unfunded by liquid resources |
|
459.8 |
35.67 |
|
147.0 |
14.2 |
|
||
1 Excluding any co-investment participations made through HGT LP.
2 Sterling equivalent of €360 million.
3 Sterling equivalent of $400 million.
4 Sterling equivalent of €115 million.
5 Partnership interest acquired during 2011.
6 Sterling equivalent of €21.6 million.
Outstanding commitments unfunded by available resources as % of NAV
Investment portfolio of HGT
|
Fund limited partnerships |
Residual cost £000 |
Total valuation1 £000 |
Portfolio value
|
|
|
Primary buyout funds: |
|
|
|
|
|
HGT 8 LP |
311,357 |
454,762 |
39.4 |
|
|
HGT 8 LP - Provision for carried interest |
- |
(23,576) |
(2.0) |
|
|
HGT Saturn LP |
137,298 |
221,379 |
19.2 |
|
|
HGT Saturn LP - Provision for carried interest |
- |
(17,919) |
(1.7) |
|
|
HGT 7 LP |
48,739 |
114,420 |
9.9 |
|
|
HGT 7 LP - Provision for carried interest |
- |
(22,885) |
(2.0) |
|
|
HGT Saturn 2 LP |
90,499 |
112,992 |
9.8 |
|
|
HGT Mercury 2 LP |
56,026 |
100,783 |
8.7 |
|
|
HGT LP |
74,638 |
81,975 |
7.1 |
|
|
HGT Genesis 9 LP |
58,465 |
57,749 |
5.0 |
|
|
HgCapital Mercury D LP |
4,672 |
33,868 |
2.9 |
|
|
HgCapital Mercury D LP - Provision for carried interest |
- |
(12,067) |
(1.0) |
|
|
HGT 6 LP |
14,861 |
24,086 |
2.1 |
|
|
HGT 6 LP - Provision for carried interest |
- |
(4,815) |
(0.4) |
|
|
Total primary buyout funds |
796,555 |
1,120,752 |
97.0 |
|
|
Secondary buyout funds: |
|
|
|
|
|
HgCapital 6 E LP |
- |
1,268 |
0.1 |
|
|
HgCapital 6 E LP - Provision for carried interest |
- |
(254) |
- |
|
|
Total secondary buyout funds |
- |
1,014 |
0.1 |
|
|
Total buyout funds |
796,555 |
1,121,766 |
97.1 |
|
|
Transition capital funds: |
|
|
|
|
|
HGT Transition Capital LP |
24,311 |
32,102 |
2.8 |
|
|
Total transition capital funds |
24,311 |
32,102 |
2.8 |
|
|
Renewable energy funds: |
|
|
|
|
|
Asper RPP I |
5,040 |
972 |
0.1 |
|
|
Total investments net of carried interest provision |
825,906 |
1,154,840 |
100.0 |
|
1 Includes accrued income but is before the deduction of the fund level facility.
Investment vintage by value
37% 2020
13% 2019
30% 2018
10% 2017
3% 2016
7% pre-2016
Analysis by value of investment return relative to its original cost2
97% Above
3% Below
2 Representing aggregate realised proceeds and unrealised valuations of an investment
Investments and realisations
Investments
Over the course of the year, Hg invested a total of £4.5 billion on behalf of its clients, with HGT's share being £403 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 which share similar underlying business model characteristics, such as: high levels of recurring revenues; a product or service which is business critical, but typically low spend; low customer concentration and low sensitivity to market cycles. This is a theme which runs through many of our new investments - and we believe that companies with these characteristics will remain in high demand across market cycles.
New investments in the year to 31 December 2020
Visma
£48.1m invested on behalf of HGT
Over 2020, Hg completed two further investments in Visma, a leading provider of business ‑ critical software to private and public enterprises in the Nordic, Benelux and Baltic regions, via the Hg Saturn 2 Fund. New investors, Warburg Pincus and TPG have also invested in the business for the first time, acquiring minority stakes, CPPIB, an existing investor has also acquired an additional stake.
Sovos
£44.3m invested on behalf of HGT
In September, Hg completed an investment in Sovos, a global tax software provider, via the Hg Saturn 2 Fund, alongside TA Associates, a leading global private equity firm with more than four decades of software investing experience, as a significant minority investor to support the next wave of Sovos' growth.
Septeo
£38.5m invested on behalf of HGT
In December, Hg completed an investment into The Septeo Group ('Septeo'), a European leader in LegalTech. Septeo is a leading LegalTech provider supporting professions including notaries, law firms, corporate legal departments and real estate property managers in France, Belgium, Canada and the US. Founded in 1988, Septeo now has over 12,000 clients and more than 120,000 users, served by over 1,400 employees. This investment reinforces Hg's focus on legal and regulatory compliance tech, representing the 11th investment in this sector across Europe and North America, with over €1.5bn invested in the sector to date.
Argus Media
£34.9m 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.
P&I
£34.6m invested on behalf of HGT, including £5m in co-investment
In March 2020, Hg completed 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.
Intelerad
£34.3m 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. 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 fifth healthcare technology investment in Hg's current portfolio.
CaseWare
£28.6m invested on behalf of HGT
In December, Hg completed an investment in CaseWare International Inc ('CaseWare'), a global leader in audit and assurance software. CaseWare is based in Toronto, Canada, and develops cutting-edge audit software solutions for accounting firms, corporations and governments. CaseWare's platforms - Working Papers and IDEA - aim to change the future of audit and audit analytics by adopting cloud technology as well as artificial intelligence and machine learning, enabling measurable returns on efficiency, quality and value, for customers and their clients. For over 30 years CaseWare has been a technology leader in the sector and has grown organically to over 500,000 users in 130 countries today, serving 16 different languages.
The Citation Group
£21.8m invested on behalf of HGT
In December, Hg completed an investment in The Citation Group ('Citation'), a leading provider of tech-enabled, subscription-based HR and Employment law, Health & Safety, and ISO services to SMEs. Citation provides tech-enabled compliance and quality related subscription services to over 40,000 SMEs across the UK. Citation helps these SMEs to comply with relevant regulations and ensure certain levels of quality and standards are met, in areas such as Health & Safety, HR / Employment Law, ISO and industry-specific rules and standards by providing a combination of expert advice, software tools and audits / assessments, mostly on a long-term subscription basis.
Gen II
£19.9m invested on behalf of HGT
In December, Hg completed an investment in Gen II Fund Services, LLC ('Gen II'), a leading independent private equity fund administrator. Gen II is a leading pure-play provider of alternative asset fund administration services. Headquartered in New York and Luxembourg with a global customer base, the company administers over $375 billion of private capital on behalf of its clients across more than 500 funds and their 25,000 investors, spanning various investment strategies including Buyout, Real Estate and Infrastructure.
smartTrade
£17.4m invested on behalf of HGT, including £10m in co-investment
In March 2020, Hg completed an investment in smartTrade Technologies ('smartTrade'), a leader in multi ‑ asset electronic trading solutions, via the Hg Mercury 2 Fund. 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.
Evaluate
£11.5m invested on behalf of HGT, including £2.5m in co-investment
In August, Hg completed the sale of and investment in Evaluate Ltd, a leading provider of commercial intelligence and predictive analytics to the pharmaceutical industry. Hg's backing will help Evaluate to continue to build out capabilities that support pharmaceutical portfolio optimisation and R&D productivity, accelerating investment in innovation and data science capabilities.
F24
£10.5m invested on behalf of HGT, including £2.5m in co-investment
In August, Hg completed an investment in F24, a pan-European sector leader for emergency notification, crisis and incident management and critical communications, headquartered in Munich, Germany. Hg has invested in a stake currently owned alongside Armira and co-founder Ralf Meister, becoming the majority shareholder in the business.
GGW Holding
£4.3m invested on behalf of HGT
In 2020, Hg began to build a substantial Property & Casualty ('P&C') insurance broking group now called GGW Holding (GGW). By now, GGW spans several B2B insurance brokers across Germany and intends to make further acquisitions.
Follow-on investments
Access
£39.0m invested on behalf of HGT
In December, Hg completed a further investment in The Access Group, a leading provider of business management software to mid-market organisations. Access is a leading UK mid-market Enterprise Resource Planning business, providing financial management systems and human capital management software, as well as industry-specific software solutions. The company's software helps over 20,000 UK businesses and not-for-profit organisations to work efficiently, with expertise across numerous industries. Hg are co-control shareholders in the company alongside TA Associates.
Achilles
£11.0m 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 called 'my.Achilles'.
New investments since the year end
Benevity
£30.9m invested on behalf of HGT including £3.6m in co-investment
In January 2021, Hg completed an investment in Benevity, Inc. ('Benevity'), a global leader in global corporate purpose cloud software. Hg will lead the investment, to be made from the Hg Saturn 2 Fund, in partnership with Benevity's current investors, General Atlantic and JMI Equity, which will remain significant investors in the business, alongside the Benevity management team. This investment comes at a time when environment, social and governance (ESG) , corporate purpose and stakeholder capitalism are taking root in companies of all sizes across the globe and as employee, consumer and public expectations grow for business to help in solving the complex issues facing society. Benevity's all-in-one, global platform enables purpose-driven brands to engage these stakeholders in supporting the causes and issues they care about through a database of nearly 2 million vetted non-profit organizations worldwide.
Geomatikk
£11.4m invested on behalf of HGT including £4.0m in co-investment
In February 2021, Hg completed an investment in Geomatikk Group, a tech-enabled services champion, managing critical 'check-before-you-dig' safety assessments to network owners, contractors and consulting engineers within Norway, Sweden and Finland. Hg will support Geomatikk with its extensive experience in scaling tech champions across Europe. Hg will become the majority investor, with founders and management remaining as significant investors in the business.
Prophix
£15.7m invested on behalf of HGT
In February 2021, Hg completed an investment in Prophix, a global leader in corporate performance management (CPM) software. Founded in 1987 and based in Ontario, Canada, Prophix is a leading provider of CPM software serving mid-market companies across multiple industries worldwide, providing planning, budgeting and financial reporting software into the 'office of the CFO'. Prophix's software allows organisations to improve their financial reporting capabilities, while also standardising and streamlining the budgeting process to generate significant ROI through a faster time to close, reduction in budgeting errors and an ability to reforecast in a more agile way.
TeamSystem
Estimated £14.3m invested on behalf of HGT
In February 2021, Hg completed the sale of its minority holding in TeamSystem, an Italian provider of ERP and business management software to SMEs and professionals and a further investment via the Hg Genesis 8 fund. Hg has held a minority position in TeamSystem since 2015, following its majority exit to a vehicle indirectly held by Hellman & Friedman Capital Partners VII, L.P.
Howden Group Holdings
Estimated £33.1m invested on behalf of HGT
In September 2020, Hg announced an investment in Howden Group Holdings (Howden Group) (formerly Hyperion Insurance Group Limited), the international insurance intermediary. Founded in 1994 and headquartered in London, Howden Group is a leading international insurance distribution group. Through its core activities of retail, speciality and reinsurance broking and through DUAL, one of the world's leading international MGAs, it facilitates the provision of B2B insurance across a wide geographic footprint. The group operates across 250+ global offices in 40 countries and employs around 8,500 people to manage around $9 billion of gross written premium on behalf of its clients. It is the fifth largest employee-owned business in the UK, with a differentiated position as a leading international insurance intermediary.
Realisations
Over the course of the year, Hg has returned a total of £4.2 billion to its clients, including £364 million to HGT.
While exits over the first six months of 2020 were slower in pace than previous years there were a number of significant realisations over the second half of the year.
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.
Full exits in the year to 31 December 2020
Visma
£193.3m returned to HGT
Over 2020, HGT completed both the sale of a portion of its co-investment and the partial sale of Hg Genesis 7's investment in Visma, a leading provider of business-critical software to private and public enterprises in the Baltic, Benelux and Nordic regions. This has helped to reduce HGT's portfolio concentration level of Visma, as well as supporting future investments' funding. The sale of the Hg Genesis 7 stake represented an uplift of 22% to the 31 December 2019 valuation of HGT's stake.
Sovos
£139.4m returned to HGT
In September, Hg completed the sale of Sovos, a global tax software provider, from the Hg Genesis 7 Fund, at an uplift of 55% to the 31 December 2019 book value. Hg will be reinvesting in Sovos alongside TA Associates, via the Hg Saturn 2 Fund.
The Citation Group
£25.8m returned to HGT
In September, Hg completed the sale of The Citation Group - a leading provider of subscription based HR and employment law, health and safety and ISO services to SMEs - to KKR, a leading global investment firm. This realisation was at an uplift of 26% to the 31 December 2019 valuation.
STP
£14.8m returned to HGT
In December, Hg completed the sale of STP, a leading DACH-based provider of legal tech solutions, to Bregal Unternehmerkapital. Founded in 1993 and headquartered in Karlsruhe, Germany, STP is a leading one-stop shop solution provider, empowering the digitisation of insolvency and legal practitioners. It provides a fully integrated legal tech platform comprising workflow automation, ERP software, specialist technical outsourcing and data businesses. STP's solutions are deeply embedded in the insolvency ecosystem and commercial law segment, with a dedicated full-suite offering. The business employs around 200 people, serving over 1,800 customers with critical software and services for their daily workflow. This realisation was at an uplift of 86% to the 31 December 2019 valuation.
Eucon
£11.5m returned to HGT
In December, Hg completed the sale of Eucon Group, a leading provider of automotive parts pricing data and claims management services, to VHV Group, a leading insurance group in Germany. Hg partnered with Eucon Group in 2015 having recognised that the business sits at the intersection of two key growth drivers for Hg: the value of big data in the automotive sector and the increasing digitisation of the insurance sector. With digital solutions and platform-based business models, Eucon helps to make the world simpler, faster and improves the experience of its customers. This realisation was at an uplift of 73% to the 31 December 2019 valuation.
Evaluate
£10.8m returned to HGT
In August, Hg completed the sale of and investment in Evaluate Ltd, a leading provider of commercial intelligence and predictive analytics to the pharmaceutical industry. The sale of Evaluate represented an uplift of 40% to the 31 December 2019 valuation of HGT's stake.
Exits since the year end
APG
Estimated £21.5m returned to HGT
In October, Hg announced the sale of APG, one of the UK's largest specialist insurance intermediaries, to Howden, the international insurance broking group. Hg partnered with APG in 2015, recognising the business's best-in-class customer success model - a personal, service-oriented approach, leading to very high levels of customer satisfaction alongside strong organic growth. Since then, Hg has worked with management to transform APG from a predominantly branch-based, personal lines insurance broker, to a business with a national footprint across multiple lines of business, supported by industry-leading data and analytics capabilities.
TeamSystem
Estimated £21.3m returned to HGT
In February 2021, Hg completed the sale of TeamSystem, an Italian provider of ERP and business management software to SMEs and professionals, from the Hg Genesis 6 fund.
To view our press releases, please visit https://www.hgcapitaltrust.com/news-insights/press-releases/year/2020
Summary of investment and realisation activity
Investments made during the year
|
Company |
Cluster |
Location |
Cost
|
|
Visma |
Tax & Accounting/ERP & Payroll |
Scandinavia |
48,116 |
|
Sovos |
Tax & Accounting |
North America |
44,325 |
|
Septeo |
Legal & Regulatory Compliance |
France |
38,545 |
|
Argus Media |
Capital Markets & Wealth Management IT |
UK |
34,869 |
|
P&I |
ERP & Payroll |
Germany |
34,571 |
|
Intelerad |
Healthcare IT |
North America |
34,303 |
|
CaseWare |
Tax & Accounting |
North America |
28,612 |
|
Citation |
SME Tech & Services |
UK |
21,824 |
|
Gen II |
Tax & Accounting |
North America |
19,921 |
|
smartTrade |
Capital Markets & Wealth Management IT |
France |
17,386 |
|
Evaluate |
Healthcare IT |
UK |
11,536 |
|
F24 |
SME Tech & Services |
Germany |
10,523 |
|
GGW Holding |
Insurance |
Germany |
4,274 |
|
New investments |
|
348,805 |
|
|
Access |
ERP & Payroll |
UK |
39,009 |
|
Achilles |
Legal & Regulatory Compliance |
UK |
11,031 |
|
Other |
|
|
4,370 |
|
Follow-on investments |
|
54,410 |
|
|
Total investments on behalf of HGT |
|
403,215 |
|
Realisations made during the year
|
Company |
Cluster |
Exit route |
Proceeds1 £000 |
|
Visma |
Tax & Accounting/ERP & Payroll |
Secondary sale |
193,328 |
|
Sovos |
Tax & Accounting |
Secondary sale |
139,374 |
|
Citation |
SME Tech & Services |
Secondary sale |
25,771 |
|
STP |
Legal & Regulatory Compliance |
Secondary sale |
14,811 |
|
Eucon |
Insurance |
Trade sale |
11,479 |
|
Evaluate |
Healthcare IT |
Secondary sale |
10,771 |
|
Full realisations |
|
395,534 |
|
|
Other |
|
|
5,531 |
|
Partial realisations |
|
|
5,531 |
|
Total proceeds from realisations |
|
|
401,065 |
|
Carried interest paid to the Manager |
|
(37,204) |
|
|
Total proceeds from realisations received by HGT |
|
363,861 |
|
1 Includes gross revenue received of £18.0m during the year ended 31 December 2020.
Hg's outlook
"We are pleased that all of our most recent platform investments across our three fund families have been into companies where founders and management teams own significant stakes in their businesses. They've chosen to partner with Hg, and we believe this is testament to the focused scale and expertise which we have built in our defined end market 'clusters' and the strong network effect which has developed across the portfolio over the last two decades."
Luke Finch, Partner and Head of Client Services, Hg
Outlook
For many, 2020 was one of the most challenging years in recent history. Against this backdrop, we are pleased with how Hg's funds and portfolio performed and contributed positively to our stakeholders' livelihoods and retirements. Our overall portfolio valuations were up over 25% for the year to December 2020, while we have returned over £4 billion of liquidity to our investors, across our funds and co-investments, including £364 million to HGT.
In December 2020, Hg celebrated its 20th anniversary as a partner-owned investment manager, capping off our busiest-ever year of activity for both investments and realisations. As we highlighted in the interim and Q3 reports, the COVID-19 pandemic has had a limited direct impact on Hg's portfolio, given its defensive growth characteristics. We believe our investments will continue to benefit from ongoing trends in the digitalisation of business processes, with COVID-19 accelerating such trends across sectors and geographies.
Similarly, our UK-based businesses have seen limited direct consequences from Brexit. Sales of software do not get snared up in paperwork at the port. Instead, software can be delivered at the click of a mouse or, in the case of SaaS products, not delivered at all, but logged into. Furthermore, tech-enabled services (and business services more generally) were typically already outside of most existing EU trade legislation. Where regulatory complexity exists (or, in the case of Brexit, increases), software typically provides part of the solution for business clients - and we are seeing several instances across our portfolio where Brexit is leading to an increased need for our businesses' software.
Activity levels
Over 2020, we made a total of 15 new and further investments including Septeo, Howden, CaseWare, Intelerad and Gen II. After the end of the reporting period, we also announced new platform investments into Benevity, Geomatikk and Prophix (please see page 53 of the full annual report and accounts for further information on these companies). We are confident in the robustness of the business models of the companies in which we have invested and in their future growth prospects in these uncertain times.
In a typical 12-month period, we make between 8 and 16 new platform investments across the active Hg Saturn, Hg Genesis and Hg Mercury funds, along with multiples of this in terms of bolt-on M&A across the portfolio. We also generally seek to deliver similar numbers of liquidity events (sales or partial sales of portfolio companies and refinancings) each year.
We expect 2021 to follow a similar cadence. We will continue to invest across our clearly defined 'clusters' into companies which we have tracked for many years and which focus on managing business ‑ critical activities for their end customers. We will continue to support companies we know well and have already backed for several years, providing fresh capital to buy out other shareholders or to fund M&A.
Over 2020, we also consistently stated that we would focus on opportunities to crystallise value across our portfolio and return money to Hg's clients, including HGT. We have seen several exit and refinancing processes announced over the year, with more currently under way or specifically planned for 2021.
In total, during 2020, we saw a record year of returns, including the sale of Visma, Sovos, The Citation Group, STP, Evaluate and Eucon - all at a significant uplift to their 31 December book value (an average of 49% across these six realisations).
Valuation environment
The overall environment has been one of net valuation expansion, albeit with significant volatility en route. On an EV/LTM-EBITDA basis (enterprise value divided by last twelve months' earnings before interest, tax, depreciation and amortisation), the valuation of the S&P 500 moved from 12.5x at the start of the year to end the year on 18.0x, up 26% - via a low of under 10x at the March nadir. The pattern was similar in Europe, with the valuation of the Euro Stoxx index up 19% over the course of the year.
Looking more specifically at our target sectors, the S&P 500 Software & Services index has historically been a good valuation proxy for Hg's software and services portfolio. The overall shape of its valuation performance was similar to the broader market - starting the year at 21.4x LTM EBITDA, falling to 16.2x in March and staging a steady recovery to end the year at 25.3x, 18% up on its starting level.
Combining the valuation movements with the change in total return for the respective indices, exposes some significant differences in the performance and its components. The total return of the software and services index, at 35%, was well ahead of its valuation expansion, demonstrating the power of earnings growth combined with valuation expansion - a trend from which Hg has also benefited. In contrast, and unsurprisingly, given the 5.4% GDP drop[1] during 2020, broad indices delivered total returns of 8-20% below their valuation expansion as the earnings of their constituent companies declined, in some cases quite materially, attenuating some of the benefit of rising valuations.
1 Source: The World Bank: Global Economic Prospects, January 2021. Retrieved on 8/2/2021 https://openknowledge.worldbank.org/bitstream/handle/10986/34710/9781464816123-Ch01.pdf
Overview of the underlying investments
held through HGT's limited partnerships
|
Investments
|
Fund |
Sector |
Location |
Year
|
Residual
|
Total valuation1 £000 |
Portfolio
|
Cum.
|
|||
|
1 |
Visma |
HGT 7/HGT Saturn/HGT Saturn 2 |
Tax & Accounting/ERP & Payroll |
Scandinavia |
2020 |
89,761 |
154,171 |
12.5 |
|
12.5 |
|
|
2 |
Access |
HGT 8 |
ERP & Payroll |
UK |
2018 |
69,500 |
131,548 |
10.6 |
|
23.1 |
|
|
3 |
IRIS |
HGT Saturn |
Tax & Accounting/ERP & Payroll |
UK |
2018 |
36,380 |
76,855 |
6.2 |
|
29.3 |
|
|
4 |
P&I |
HGT Saturn/HGT |
ERP & Payroll |
Germany |
2020 |
36,367 |
64,295 |
5.2 |
|
34.5 |
|
|
5 |
Transporeon |
HGT 8/HGT |
ERP & Payroll |
Germany |
2019 |
41,968 |
56,492 |
4.6 |
|
39.1 |
|
|
6 |
Litera |
HGT 8 |
Legal & Regulatory Compliance |
N. America |
2019 |
34,242 |
49,771 |
4.0 |
|
43.1 |
|
|
7 |
Intelerad |
HGT 8 |
Healthcare IT |
N. America |
2020 |
34,303 |
48,598 |
3.9 |
|
47.0 |
|
|
8 |
Argus Media |
HGT Saturn/HGT |
Capital Mkts & Wealth Mgmt IT |
UK |
2020 |
34,869 |
45,822 |
3.7 |
|
50.7 |
|
|
9 |
team.blue |
HGT8/Mercury 2 |
SME Tech & Services |
Benelux |
2019 |
24,238 |
43,909 |
3.6 |
|
54.3 |
|
|
10 |
Sovos |
HGT Saturn 2 |
Tax & Accounting |
N. America |
2020 |
44,325 |
43,176 |
3.5 |
|
57.8 |
|
|
11 |
MeinAuto |
HGT 8 |
Automotive |
Germany |
2017 |
33,967 |
39,428 |
3.2 |
|
61.0 |
|
|
12 |
Septeo |
HGT 9 |
Legal & Regulatory Compliance |
France |
2020 |
38,545 |
39,075 |
3.2 |
|
64.2 |
|
|
13 |
Azets |
HGT 7/HGT |
Tax & Accounting |
UK |
2016 |
20,966 |
37,873 |
3.1 |
|
67.3 |
|
|
14 |
FE fundinfo |
Mercury/Mercury 2 |
Capital Mkts & Wealth Mgmt IT |
UK |
2017 |
6,687 |
34,720 |
2.8 |
|
70.1 |
|
|
15 |
Allocate |
HGT 8 |
Healthcare IT |
UK |
2018 |
13,959 |
34,137 |
2.8 |
|
72.9 |
|
|
16 |
Mitratech |
HGT 7/HGT |
Legal & Regulatory Compliance |
N. America |
2017 |
22,258 |
33,307 |
2.7 |
|
75.6 |
|
|
17 |
CaseWare |
HGT 8 |
Tax & Accounting |
N. America |
2020 |
28,612 |
29,080 |
2.4 |
|
78.0 |
|
|
18 |
Medifox |
Mercury 2/HGT |
Healthcare IT |
Germany |
2018 |
11,824 |
24,190 |
2.0 |
|
80.0 |
|
|
19 |
Citation |
HGT 8 |
SME Tech & Services |
UK |
2020 |
21,824 |
22,523 |
1.8 |
|
81.8 |
|
|
20 |
IT Relation |
HGT 8 |
SME Tech & Services |
Scandinavia |
2018 |
16,037 |
21,525 |
1.7 |
|
83.5 |
|
|
21 |
APG |
HGT 7 |
Insurance |
UK |
2015 |
1,697 |
21,396 |
1.7 |
|
85.2 |
|
|
22 |
TeamSystem |
HGT 6 |
Tax & Accounting/ERP & Payroll |
Italy |
2010 |
144 |
21,331 |
1.7 |
|
86.9 |
|
|
23 |
Commify |
Mercury/HGT |
SME Tech & Services |
UK |
2017 |
4,080 |
20,798 |
1.7 |
|
88.6 |
|
|
24 |
BrightPay |
Transition |
ERP & Payroll |
Ireland |
2018 |
14,533 |
19,927 |
1.6 |
|
90.2 |
|
|
25 |
Gen II |
HGT 9 |
Tax & Accounting |
N. America |
2020 |
19,921 |
18,707 |
1.5 |
|
91.7 |
|
|
26 |
Lyniate |
Mercury 2 |
Healthcare IT |
N. America |
2018 |
10,528 |
18,448 |
1.5 |
|
93.2 |
|
|
27 |
smartTrade |
Mercury 2/HGT |
Capital Mkts & Wealth Mgmt IT |
France |
2020 |
17,386 |
18,327 |
1.5 |
|
94.7 |
|
|
28 |
Achilles |
HGT/Transition |
Legal & Regulatory Compliance |
UK |
2008 |
28,328 |
17,701 |
1.4 |
|
96.1 |
|
|
29 |
Evaluate |
Mercury 2/HGT |
Healthcare IT |
UK |
2020 |
11,536 |
12,547 |
1.0 |
|
97.1 |
|
|
30 |
F24 |
Mercury 2/HGT |
SME Tech & Services |
Germany |
2020 |
10,523 |
10,704 |
0.9 |
|
98.0 |
|
|
31 |
GGW Holding |
Mercury 2 |
Insurance |
Germany |
2020 |
4,274 |
5,646 |
0.5 |
|
98.5 |
|
|
32 |
Trace One |
Mercury |
Legal & Regulatory Compliance |
France |
2016 |
493 |
4,328 |
0.4 |
|
98.9 |
|
|
33 |
Silverfin |
Mercury 2 |
Tax & Accounting |
Benelux |
2019 |
3,214 |
4,228 |
0.3 |
|
99.2 |
|
|
34 |
Noventic |
HGT 6 |
Other |
Germany |
2012 |
922 |
2,755 |
0.2 |
|
99.4 |
|
|
35 |
GenTrack |
HGT 7 |
Other |
N. Zealand |
2017 |
2,686 |
948 |
0.1 |
|
99.5 |
|
|
36 |
EidosMedia |
HGT 7 |
SME Tech & Services |
Italy |
2015 |
7,467 |
442 |
- |
|
99.5 |
|
|
|
Non-active investments (3) |
|
|
|
22,502 |
- |
- |
|
99.5 |
|
|
|
|
Total buyout investments (39) |
|
|
|
820,866 |
1,228,728 |
99.5 |
|
|
||
|
|
Currency hedges |
Various |
Forward sale of US$ and € |
- |
5,388 |
0.3 |
|
99.8 |
|
||
|
|
Secondary fund |
Hg 6 E |
Secondary fund interests |
- |
1,268 |
0.1 |
|
99.9 |
|
||
|
|
Renewable energy |
Asper I |
Renewable energy |
5,040 |
972 |
0.1 |
|
100.0 |
|
||
|
|
Total all investments |
|
|
|
825,906 |
1,236,356 |
100.0 |
|
|
||
1 Including accrued income, but before the provision for carried interest of £81,516,000 and the fund level facility of £59,771,000.
Non-Statutory Accounts
The financial information set out below does not constitute the Company's statutory accounts for the years ended 31 December 2019 and 2020 but is derived from those accounts. Statutory accounts for 2019 have been delivered to the Registrar of Companies, and those for 2020 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 2020
|
|
Notes |
Revenue return |
Capital return |
Total return |
|||||||||
|
2020 |
2019 |
2020 |
2019 |
2020 |
2019 |
||||||||
|
£000 |
£000 |
£000 |
£000 |
£000 |
£000 |
||||||||
|
Gains on investments and liquidity funds |
13 |
- |
|
- |
|
233,322 |
|
161,389 |
|
233,322 |
|
161,389 |
|
|
(Losses)/gains on priority profit share loans
|
5(b) |
- |
|
- |
|
(3,176) |
|
4,679 |
|
(3,176) |
|
4,679 |
|
|
Net income |
4 |
24,682 |
|
15,549 |
|
- |
|
- |
|
24,682 |
|
15,549 |
|
|
Other expenses |
6(a) |
(4,846) |
|
(3,288) |
|
- |
|
- |
|
(4,846) |
|
(3,288) |
|
|
Net return before finance costs and taxation |
|
19,836 |
|
12,261 |
|
230,146 |
|
166,068 |
|
249,982 |
|
178,329 |
|
|
Finance costs |
6(b) |
(3,025) |
|
(755) |
|
- |
|
- |
|
(3,025) |
|
(755) |
|
|
Net return before taxation |
|
16,811 |
|
11,506 |
|
230,146 |
|
166,068 |
|
246,957 |
|
177,574 |
|
|
Taxation |
9 |
(2) |
|
(80) |
|
- |
|
- |
|
(2) |
|
(80) |
|
|
Net return after taxation |
|
16,809 |
|
11,426 |
|
230,146 |
|
166,068 |
|
246,955 |
|
177,494 |
|
|
|
|
|
|
|
|
|
|
||||||
|
Return per ordinary share |
10(a) |
4.11 |
p |
2.94 |
p |
56.30 |
p |
42.77 |
p |
60.41 |
p |
45.71 |
p |
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 2020
|
|
Notes |
2020 |
2019 |
||
|
|
|
£000 |
£000 |
||
|
Fixed asset investments |
|
|
|
||
|
Investments at fair value through profit or loss: |
|
|
|
||
|
Unquoted investments |
12 |
1,024,116 |
|
788,013 |
|
|
Total fixed asset investments |
|
1,024,116 |
|
788,013 |
|
|
Current assets - amounts receivable after one year: |
|
|
|
||
|
Accrued income on fixed assets |
14 |
70,953 |
|
54,266 |
|
|
Current assets - amounts receivable within one year: |
|
|
|
||
|
Debtors |
14 |
9,528 |
|
8,961 |
|
|
Investments at fair value through profit or loss: |
|
|
|
||
|
Liquidity funds |
15 |
139,470 |
|
184,505 |
|
|
Uninvested capital in limited partnerships |
12(a) |
26,471 |
|
226 |
|
|
Cash at bank |
16 |
21,648 |
|
4,558 |
|
|
Total current assets |
|
268,070 |
|
252,516 |
|
|
Creditors - amounts falling due within one year |
17 |
(1,170) |
|
(1,231) |
|
|
Net current assets |
|
266,900 |
|
251,285 |
|
|
Net assets |
|
1,291,016 |
|
1,039,298 |
|
|
Capital and reserves: |
|
|
|
||
|
Called-up share capital |
20 |
10,400 |
|
10,186 |
|
|
Share premium account |
21 |
219,722 |
|
194,774 |
|
|
Capital redemption reserve |
21 |
1,248 |
|
1,248 |
|
|
Capital reserve - unrealised |
21 |
240,712 |
|
264,953 |
|
|
Capital reserve - realised |
21 |
798,988 |
|
544,601 |
|
|
Revenue reserve |
21 |
19,946 |
|
23,536 |
|
|
Total equity shareholders' funds |
|
1,291,016 |
|
1,039,298 |
|
|
Net asset value per ordinary share |
10(b) |
310.3 |
p |
255.1 |
p |
|
Ordinary shares in issue at 31 December |
|
415,999,808 |
|
407,424,808 |
|
The financial statements of HgCapital Trust plc (registered number 01525583) above (or on pages 82-105 in the full annual report and accounts ) were approved and authorised for issue by the Board of Directors on 12 March 2021 and signed on its behalf by:
Jim Strang, Chairman
Richard Brooman, Director
The following notes form part of these financial statements.
Statement of cash flows
for the year ended 31 December 2020
| Notes | 2020 | 2019 | ||
|
| £000 | £000 | ||
Net cash outflow from operating activities | 7 | (69,041) |
| (4,657) |
|
Investing activities: |
|
|
| ||
Purchase of fixed asset investments | 12 | (403,215) |
| (117,284) |
|
Proceeds from the sale of fixed asset investments |
| 441,359 |
| 96,621 |
|
Purchase of liquidity funds | 15 | (271,900) |
| (90,000) |
|
Redemption of liquidity funds | 15 | 318,149 |
| 61,100 |
|
Net cash inflow/(outflow) from investing activities |
| 84,393 |
| (49,563) |
|
Financing activities: |
|
|
| ||
Servicing of finance |
| (3,025) |
| (1,475) |
|
Equity dividends paid | 11 | (20,399) |
| (18,444) |
|
Proceeds from issue of shares |
| 25,162 |
| 75,261 |
|
Net cash inflow from financing activities |
| 1,738 |
| 55,342 |
|
|
|
|
| ||
Increase in cash and cash equivalents in the year | 16 | 17,090 |
| 1,122 |
|
Cash and cash equivalents at 1 January | 16 | 4,558 |
| 3,436 |
|
Cash and cash equivalents at 31 December | 16 | 21,648 |
| 4,558 |
|
The following notes form part of these financial statements.
Statement of changes in equity
for the year ended 31 December 2020
|
| Non-distributable | Distributable |
| |||||||||||
| Notes | Share | Share | Capital redemption | Capital | Capital | Revenue | Total | |||||||
At 1 January 2020 |
| 10,186 |
| 194,774 |
| 1,248 |
| 264,953 |
| 544,601 |
| 23,536 |
| 1,039,298 |
|
Net return after taxation |
| - |
| - |
| - |
| (24,241) |
| 254,387 |
| 16,809 |
| 246,955 |
|
Contributions of equity |
| 214 |
| 24,948 |
| - |
| - |
| - |
| - |
| 25,162 |
|
Equity dividends paid | 4 | - |
| - |
| - |
| - |
| - |
| (20,399) |
| (20,399) |
|
At 31 December 2020 |
| 10,400 |
| 219,722 |
| 1,248 |
| 240,712 |
| 798,988 |
| 19,946 |
| 1,291,016 |
|
At 1 January 2019 |
| 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 net of transaction costs |
| 855 |
| 74,406 |
| - |
| - |
| - |
| - |
| 75,261 |
|
Equity dividends paid | 4 | - |
| - |
| - |
| - |
| - |
| (18,444) |
| (18,444) |
|
At 31 December 2019 |
| 10,186 |
| 194,774 |
| 1,248 |
| 264,953 |
| 544,601 |
| 23,536 |
| 1,039,298 |
|
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 12-month period from the date of approval of this report.
Accordingly, they continue to adopt the going-concern basis in preparing these financial statements.
The same accounting policies, presentation and methods of computation are followed in these financial statements as were 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 ten 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, February 2018 and February 2020; 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, HGT Transition Capital LP, HGT Saturn 2 LP and HGT Genesis 9 LP (together the 'primary buyout funds'), is to hold all of 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 which 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 49 in the full annual report and accounts. The underlying investments which are held indirectly are included in the overview of investments on page 58 in the full annual report and accounts.
Consolidated financial statements have not been prepared because HGT does not have control over the operating or 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 6 E LP'), one of the partnerships which 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 6 E LP Fund, as shown on the balance sheet and in the table of investments on page 49 in the full annual report and accounts.
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'). This is a direct investment in the renewable funds, as shown on the balance sheet and in the table of investments on page 49 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 7) 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 recoverable from the general partner only by an appropriation of net income; until net income is earned, no value is attributed to this loan (see note 7(b)).
Furthermore, under the primary buyout funds' LPAs, each founder partner (see note 7(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 6, 7 and 9 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 which has 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 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;
(ii) 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 45 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 59 and 79 in the full annual report and accounts. A sensitivity analysis to equity price risk can be found in note 19.
4. Income
| Revenue return | |||
| 2020 | 2019 | ||
| £000 | £000 | ||
Total net income comprises: |
|
| ||
Interest | 24,682 |
| 15,549 |
|
Total net income | 24,682 |
| 15,549 |
|
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 | |||
| 2020 | 2019 | ||
| £000 | £000 | ||
Income from investments held by the primary buyout funds |
|
| ||
Unquoted investment income | 34,725 |
| 27,847 |
|
Other investment income: |
|
| ||
Unquoted investment income | - |
| 1,378 |
|
Liquidity funds income | 1,335 |
| 1,788 |
|
Total investment income | 36,060 |
| 31,013 |
|
Total other income | 60 |
| 46 |
|
Total income | 36,120 |
| 31,059 |
|
Priority profit share charge against income: |
|
| ||
Current year - HGT 8 LP | (5,711) |
| (10,463) |
|
Current year - HGT Mercury 2 LP | (2,092) |
| (1,654) |
|
Current year - HGT 7 LP | (1,756) |
| (2,148) |
|
Current year - HGT Saturn LP | (1,281) |
| (665) |
|
Current year - HgCapital Mercury D LP | (371) |
| (392) |
|
Current year - HGT Transition Capital LP | (187) |
| (188) |
|
Current year - HGT LP | (40) |
| - |
|
Total priority profit share charge against income (note 5(a)) | (11,438) |
| (15,510) |
|
Total net income | 24,682 |
| 15,549 |
|
5. Priority profit share and carried interest
| Revenue return | |||
| 2020 | 2019 | ||
(a) Priority profit share payable to general partners | £000 | £000 | ||
Priority profit share payable: |
|
| ||
Current year amount | 14,614 |
| 10,831 |
|
Less: Current year loans advanced to general partners (note 5(b)) | (3,922) |
| (31) |
|
Add: Prior year loans recovered from general partners (note 5(b)) | 746 |
| 4,710 |
|
Current year charge against income | 11,438 |
| 15,510 |
|
Total priority profit share charge against income | 11,438 |
| 15,510 |
|
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 118 in the full annual report and accounts.
The terms of the above priority profit share arrangements during 2020 were:
Fund partnership | Priority profit share (% p.a) |
HGT 8 LP | 1.75% on the fund commitment during the investment period, stepping down to 1.5% on invested capital |
HGT Mercury 2 LP | 1.75% on the fund commitment during the investment period |
HGT Saturn 2 LP | 1.0% on the fund commitment during the investment period |
HGT Genesis 9 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 during the investment period, stepping down to 0.75% 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 LP | 1.5% of original cost of investments in the fund, less the original cost of investments that have been realised or written off. |
| Capital return | |||
| 2020 | 2019 | ||
(b) Priority profit share loans to general partners | £000 | £000 | ||
Movement on loans to general partners: |
|
| ||
Losses on current-year loans advanced to general partners | (3,922) |
| (31) |
|
Gains on prior-year loans recovered from general partners | 746 |
| 4,710 |
|
Total (losses)/gains on priority profit share loans (advanced to)/recovered from general partners | (3,176) |
| 4,679 |
|
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.
| Capital return | |||
| 2020 | 2019 | ||
(c) Carried interest to founder partners | £000 | £000 | ||
Carried interest charge against capital gains: |
|
| ||
Current period charge against realised capital gains | 37,204 |
| 1,511 |
|
Current year charge against unrealised capital gains | 23,429 |
| 15,775 |
|
Total carried-interest charge against capital gains | 60,633 |
| 17,286 |
|
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 118 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 2020, £37,204,000 (2019: £1,511,000) of carried interest was paid in respect of the current financial year. If the investments in HGT 6 LP, HGT 7 LP, HGT 8 LP, HGT Saturn 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 £81,515,738 will be payable to the Founder Partner (2019: £58,087,167 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 | |||
| 2020 | 2019 | ||
(a) Operating expenses | £000 | £000 | ||
Registrar, management and administration fees | 1,108 |
| 975 |
|
Directors remuneration (note 8) | 292 |
| 284 |
|
Legal and other administration costs1 | 3,340 |
| 1,927 |
|
| 4,740 |
| 3,186 |
|
Fees payable to the Company's auditor in relation to the Company: |
|
| ||
Audit fees2 | 106 |
| 102 |
|
Total fees payable to HGT's auditor | 106 |
| 102 |
|
Total other expenses | 4,846 |
| 3,288 |
|
|
|
|
|
|
1 Includes employer's National Insurance contributions of £34,030 (2019: £31,838).
2 In 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 £69,000 (2019: £55,200) inclusive of VAT.
| Revenue return | |||
| 2020 | 2019 | ||
(b) Finance costs | £000 | £000 | ||
Interest paid | 1,444 |
| - |
|
Non-utilisation fees and other expenses | 717 |
| 755 |
|
Arrangement fees | 864 |
| - |
|
Total finance costs | 3,025 |
| 755 |
|
7. Cash flow from operating activities
Reconciliation of net return before finance costs and taxation | 2020 | 2019 | ||
£000 | £000 | |||
Net return before finance costs and taxation | 249,982 |
| 178,329 |
|
Gains on investments held at fair value and liquidity funds | (260,351) |
| (179,785) |
|
Carried interest paid | (37,204) |
| (1,511) |
|
Increase in carried interest provision | 23,429 |
| 15,775 |
|
Increase in accrued income from liquidity funds | (1,335) |
| (1,788) |
|
Increase in prepayments, accrued income and other debtors | (17,254) |
| (15,989) |
|
(Decrease)/increase in creditors | (61) |
| 288 |
|
Increase in uninvested capital | (26,245) |
| - |
|
Taxation (paid)/received | (2) |
| 24 |
|
Net cash outflow from operating activities | (69,041) |
| (4,657) |
|
8. Directors' remuneration
The aggregate remuneration of the Directors for the year to 31 December 2020 was £291,684 (2019: £284,000). Further information on the Directors' remuneration is disclosed in the Directors' remuneration report on pages 134-136 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 4) 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 2020.
The rate of corporation tax in the UK for a company was 19% during the year (2019: tax rate of 19%). However, the tax charge in the current and previous year was lower than the standard and effective tax rate, owing largely 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 | |||
| 2020 | 2019 | ||
(a) Analysis of charge in the year | £000 | £000 | ||
Current tax: |
|
| ||
UK corporation tax | 2,798 |
| 1,626 |
|
Income streaming relief | (2,802) |
| (1,626) |
|
Prior year adjustment | 6 |
| (24) |
|
Current revenue tax charge/(credit) for the year | 2 |
| (24) |
|
Deferred tax: |
|
| ||
Reversal of timing differences | - |
| 104 |
|
Total deferred tax charge for the year (note 9(c)) | - |
| 104 |
|
Total taxation charge | 2 |
| 80 |
|
| Revenue return | |||
| 2020 | 2019 | ||
(b) Factors affecting tax charge for the year | £000 | £000 | ||
Net revenue return before taxation | 16,811 |
| 11,506 |
|
UK corporation tax charge at 19% thereon (2019: 19%) | 3,194 |
| 2,186 |
|
Effects of: |
|
| ||
Tax relief from interest distribution | (2,802) |
| (1,626) |
|
Tax relief from expenses allocated to capital | (396) |
| (456) |
|
Prior year tax adjustment | 6 |
| (24) |
|
Total differences | (3,192) |
| (2,106) |
|
Total taxation charge | 2 |
| 80 |
|
| Revenue return | |||
| 2020 | 2019 | ||
(c) Deferred tax | £000 | £000 | ||
Deferred tax: |
|
| ||
Movement in taxable income not recognised in revenue return | - |
| 104 |
|
Total deferred tax charge for the year (note 9(a)) | - |
| 104 |
|
Deferred tax recoverable: |
|
| ||
Recoverable deferred tax at 31 December | - |
| 104 |
|
Deferred tax charge for the year | - |
| (104) |
|
Recoverable deferred tax at end of year | - |
| - |
|
Deferred tax assets of £nil were recognised at 31 December 2020 (2019: £nil at a 19% tax rate)
10. Return and net asset value per Ordinary share
| Revenue return | Capital return | ||||||
(a) Return per ordinary share | 2020 | 2019 | 2020 | 2019 | ||||
Amount (£000): |
|
|
|
| ||||
Net return after taxation | 16,809 |
| 11,426 |
| 230,146 |
| 166,068 |
|
Weighted average number of ordinary shares ('000): |
|
|
|
| ||||
Weighted average number of ordinary shares in issue | 408,765 |
| 388,267 |
| 408,765 |
| 388,267 |
|
Return per ordinary share (pence) | 4.11 |
| 2.94 |
| 56.30 |
| 42.77 |
|
| Capital return | |||
(b) Net asset value per ordinary share | 2020 | 2019 | ||
Amount (£000): |
|
| ||
Net assets | 1,291,016 |
| 1,039,298 |
|
Number of ordinary shares ('000): |
|
| ||
Number of ordinary shares in issue | 416,000 |
| 407,425 |
|
Net asset value per ordinary share (pence) | 310.3 |
| 255.1 |
|
11. Dividends on ordinary shares
|
|
| 2020 | 2019 | ||
| Record date | Payment date | £000 | £000 | ||
Interim Dividend of 2.0p for the year ended 31 December 2020 | 24 September 2020 | 28 October 2020 | 8,176 |
| - |
|
Final Dividend of 3.0p for the year ended 31 December 2019 | 19 March 2020 | 15 May 2020 | 12,223 |
| - |
|
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 |
|
Total equity dividends paid |
|
| 20,399 |
| 18,444 |
|
The proposed final dividend of 3.0p per ordinary share for the year ended 31 December 2020 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:
| 2020 | 2019 | ||
| £000 | £000 | ||
Revenue available for distribution by way of dividend for the year | 16,809 |
| 11,426 |
|
Interim dividend of 2.0p for the year ended 31 December 2020 (paid on 28 October 2020) | (12,223) |
| (7,247) |
|
Proposed final dividend of 3.0p for the year ended 31 December 2020 (based on 415,999,808 ordinary shares in issue at 31 December 2020) | (12,480) |
| (12,223) |
|
Distributions in excess of revenue for Section 1159 purposes* | (7,894) |
| (8,044) |
|
*Distributions in excess of revenue are financed by the revenue reserve
12. Fixed asset investments
| 2020 | 2019 | ||
| £000 | £000 | ||
Investments held at fair value through profit and loss: |
|
| ||
Unquoted investments held in HGT 8 LP | 431,092 |
| 217,635 |
|
Unquoted investments held in HGT Saturn LP | 208,138 |
| 114,981 |
|
Unquoted investments held in HGT Saturn 2 LP | 112,992 |
| - |
|
Unquoted investments held in HGT 7 LP | 103,527 |
| 255,127 |
|
Unquoted investments held in HGT Mercury 2 LP | 94,659 |
| 39,679 |
|
Unquoted investments held in HGT LP | 71,108 |
| 137,075 |
|
Unquoted investments held in HGT Genesis 9 LP | 57,734 |
| - |
|
Unquoted investments held in HgCapital Mercury D LP | 30,702 |
| 38,432 |
|
Unquoted investments held in HGT Transition Capital LP | 29,126 |
| 16,049 |
|
Unquoted investments held in HGT 6 LP | 24,086 |
| 24,099 |
|
Other unquoted investments held by the company | 2,239 |
| 3,023 |
|
Total fixed asset investments gross of carried interest provision | 1,165,403 |
| 846,100 |
|
Carried interest provision (note 5(c)) | (81,516) |
| (58,087) |
|
Fund level facility (HGT 8 LP) | (59,771) |
| - |
|
Total fixed asset investments | 1,024,116 |
| 788,013 |
|
Total fixed asset investments consist of: |
|
| ||
Fund limited partnerships | 1,024,116 |
| 788,013 |
|
|
| 2020 | 2019 | ||
|
| £000 | £000 | ||
Opening valuation as at 1 January |
| 788,013 |
| 609,663 |
|
Opening unrealised appreciation | -investments | (329,086) |
| (173,265) |
|
Opening carried interest provision |
| 58,087 |
| 42,312 |
|
Opening book cost as at 1 January |
| 517,014 |
| 478,710 |
|
Movements in the year: |
|
|
| ||
Additions at cost |
| 403,215 |
| 117,284 |
|
Disposals | - proceeds | (383,025) |
| (103,558) |
|
| - realised gains on sales | 288,702 |
| 24,578 |
|
Closing book cost of investments |
| 825,906 |
| 517,014 |
|
Add: closing unrealised appreciation | - investments | 339,497 |
| 329,086 |
|
Less: closing carried interest provision |
| (81,516) |
| (58,087) |
|
Less: advanced proceeds (HGT 8 LP) |
| (59,771) |
| - |
|
Closing valuation of investments at 31 December | 1,024,116 |
| 788,013 |
| |
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 87 in the full annual report and accounts, and investments in fund limited partnerships in Hg 6 E LP and Asper Renewable Power Partners LP. The net assets attributable to partners at 31 December 2019, being the date of the last audited balance sheet, of these primary buyout funds were £146,183,838 (HGT LP), £24,089,389 (HGT 6 LP), £269,630,378 (HGT 7 LP), £45,548,750 (HgCapital Mercury D LP), £232,766,673 (HGT 8 LP), £41,530,217 (HGT Mercury 2 LP), £120,618,165 (HGT Saturn LP) and £16,889,216 (HGT Transition Capital LP).
a) Uninvested capital in limited partnerships
Uninvested capital in the limited partnerships relates to cash held in the underlying limited partnerships as a result of timing differences before an investment or after a realisation. Cash held at the fund level at the 31 December 2020 was £26.5 million (2019: £0.2 million).
13. Gains on investments and liquidity funds
|
| Capital return | |||
|
| 2020 | 2019 | ||
|
| £000 | £000 | ||
Realised: |
|
|
| ||
Realised gains/(losses) | - fixed asset investments | 288,702 |
| 24,578 |
|
| - liquidity funds | 2,117 |
| 408 |
|
| - aborted deal fees | 548 |
| (2,402) |
|
| - loan facility | 224 |
| - |
|
|
| 291,591 |
| 22,584 |
|
Carried interest charge against realised capital gains (note 5(c)) | (37,204) |
| (1,511) |
| |
Net realised gains |
| 254,387 |
| 21,073 |
|
Unrealised: |
|
|
| ||
Unrealised gains/(losses) | - fixed asset investments | 10,411 |
| 155,821 |
|
| - foreign exchange on investments | (2,288) |
| - |
|
| - liquidity funds | (2,238) |
| 489 |
|
| - aborted deal fees | (2,084) |
| (219) |
|
|
| 3,801 |
| 156,091 |
|
Carried interest charge against unrealised capital gains (note 5(c)) | (23,429) |
| (15,775) |
| |
Fund level refinancing (HGT 8 LP) |
| (1,437) |
| - |
|
Net unrealised (losses) / gains |
| (21,065) |
| 140,316 |
|
Total gains |
| 233,322 |
| 161,389 |
|
Page 45 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
| 2020 | 2019 | ||
| £000 | £000 | ||
Amounts receivable after one year: |
|
| ||
Accrued income on fixed assets | 70,953 |
| 54,266 |
|
Amounts receivable within one year: |
|
| ||
Prepayments and other debtors | 9,528 |
| 2,024 |
|
Deferred consideration | - |
| 6,937 |
|
Total amounts receivable within one year | 9,528 |
| 8,961 |
|
Total debtors | 80,481 |
| 63,227 |
|
The Directors consider that the carrying amount of debtors approximates their fair value.
15. Liquidity funds
| 2020 | 2019 | ||
| £000 | £000 | ||
Investments held at fair value through profit or loss: |
|
| ||
Opening valuation | 184,505 |
| 152,920 |
|
Purchases at cost | 271,900 |
| 90,000 |
|
Redemptions | (318,149) |
| (61,100) |
|
Movement in unrealised capital (losses)/gains | (2,238) |
| 489 |
|
Movement in accrued income | 1,335 |
| 1,788 |
|
Realised capital gains | 2,117 |
| 408 |
|
Closing valuation | 139,470 |
| 184,505 |
|
16. Movement in net funds
| 2020 | 2019 | ||
| £000 | £000 | ||
Analysis and reconciliation of net funds: |
|
| ||
Change in cash | 17,090 |
| 1,122 |
|
Net funds at 1 January | 4,558 |
| 3,436 |
|
Net funds at 31 December | 21,648 |
| 4,558 |
|
Net funds comprise: |
|
| ||
Cash | 21,648 |
| 4,558 |
|
17. Creditors - amounts falling due within one year
| 2020 | 2019 | ||
| £000 | £000 | ||
Accruals | 1,170 |
| 1,231 |
|
Total creditors | 1,170 |
| 1,231 |
|
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. In October 2020 this facility was repaid in full and a revised facility agreed for £200,000,000. Under the facility agreement, HGT is liable to pay interest on any drawn amount at LIBOR plus a margin of 3.25%. A commitment fee of 1.15% is liable on any undrawn commitment. The term of this facility is four years. 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, Hg 6 E 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, HGT Saturn 2 LP, HGT Genesis 9 LP and HGT Transition Capital LP as described in note 3 above (on page 87 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 49 in the full annual report and accounts and a breakdown of the most significant underlying investments is given on page 58 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. Page 47 in the full annual report and accounts includes details of the most significant assumptions included in the valuations. 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 101 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 | Level 2 | Level 3 | Total | ||||
| £000 | £000 | £000 | £000 | ||||
Investments held at fair value through profit and loss: |
|
|
|
| ||||
Unquoted investments |
|
|
|
| ||||
- Investment in HGT 8 LP | - |
| - |
| 431,092 |
| 431,092 |
|
- Investment in HGT Saturn LP | - |
| - |
| 208,138 |
| 208,138 |
|
- Investment in HGT Saturn 2 LP | - |
| - |
| 112,992 |
| 112,992 |
|
- Investment in HGT 7 LP | - |
| - |
| 103,527 |
| 103,527 |
|
- Investment in HGT Mercury 2 LP | - |
| - |
| 94,659 |
| 94,659 |
|
- Investment in HGT LP | - |
| - |
| 71,108 |
| 71,108 |
|
- Investment in HGT Genesis 9 LP | - |
| - |
| 57,734 |
| 57,734 |
|
- Investment in Hg Mercury D LP | - |
| - |
| 30,702 |
| 30,702 |
|
- Investment in HGT Transition Capital LP | - |
| - |
| 29,126 |
| 29,126 |
|
- Investment in HGT 6 LP | - |
| - |
| 24,086 |
| 24,086 |
|
- Investment in Hg 6 E LP | - |
| - |
| 1,267 |
| 1,267 |
|
- Investment in Asper RPP I LP | - |
| - |
| 972 |
| 972 |
|
- Liquidity funds | - |
| 139,470 |
| - |
| 139,470 |
|
- Carried interest provision | - |
| - |
| (81,516) |
| (81,516) |
|
- Fund level refinancing | - |
| - |
| (59,771) |
| (59,771) |
|
- Uninvested capital in limited partnerships | - |
| - |
| 26,471 |
| 26,471 |
|
As at 31 December 2020 | - |
| 139,470 |
| 1,050,587 |
| 1,190,057 |
|
| Level 1 | Level 2 | Level 3 | Total | ||||
| £000 | £000 | £000 | £000 | ||||
Investments held at fair value through profit and 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 Hg 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 |
|
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 2020 by class of financial instrument.
Total investments in limited partnerships | 2020 | 2019 | ||
| £000 | £000 | ||
Unquoted investments: |
|
| ||
Opening balance | 788,013 |
| 609,663 |
|
Purchases | 403,215 |
| 117,284 |
|
Realisations at 31 December 2019 valuation | 94,046 |
| (78,630) |
|
Unrealised appreciation of fixed asset investments | (177,958) |
| 155,471 |
|
Movement in net carried interest provision | (23,429) |
| (15,775) |
|
Fund level refinancing | (59,771) |
| - |
|
Closing unrealised valuation of level 3 investments | 1,024,116 |
| 788,013 |
|
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:
| 2020 | 2019 | ||||||
| £000 | NAV per | £000 | NAV per | ||||
Sensitivity to equity price risk: |
|
|
|
| ||||
Change in the value of unquoted investments | (85,197) |
| (20.0) |
| (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 (£82 million at 31 December 2020), but only in funds where an adjustment for carried interest is required (Hg Genesis 6, Hg Genesis 7, Mercury 1, Hg Genesis 8 and Hg Saturn, see note 5(c) or on page 92 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 £17,715,000, 4.3 pence per ordinary share (2019: £5,722,000, 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 46 of the Manager's report in the full annual report and accounts for an analysis of the portfolio trading performance as at 31 December 2020. 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.
| 2020 |
| 2019 | ||||||||||||||
| Revenue return | Capital return |
| Revenue return | Capital return | ||||||||||||
|
| NAV per ordinary share |
| NAV per ordinary share |
|
| NAV per ordinary share |
| NAV per ordinary share | ||||||||
| £000 | Pence | £000 | Pence |
| £000 | Pence | £000 | Pence | ||||||||
Highest value against sterling during the year: |
|
|
|
|
|
|
|
|
| ||||||||
Danish krone | 119 |
| 0.3 |
| 793 |
| 1.9 |
|
| 141 |
| 0.3 |
| 2,034 |
| 5.0 |
|
Euro | 1,375 |
| 3.3 |
| 16,436 |
| 39.5 |
|
| 1,554 |
| 3.8 |
| 22,091 |
| 54.2 |
|
New Zealand dollar | - |
| - |
| 17 |
| - |
|
| - |
| - |
| 102 |
| 0.3 |
|
Norwegian krone | - |
| - |
| 2,262 |
| 5.4 |
|
| - |
| - |
| 20,095 |
| 49.3 |
|
US dollar | 356 |
| 0.9 |
| 31,134 |
| 74.8 |
|
| 276 |
| 0.7 |
| 15,751 |
| 38.7 |
|
Canadian dollar | 6 |
| - |
| 3,293 |
| 7.9 |
|
| - |
| - |
| - |
| - |
|
| 1,856 |
| 4.5 |
| 53,935 |
| 129.7 |
|
| 1,971 |
| 4.8 |
| 60,073 |
| 147.5 |
|
Lowest value against sterling during the year: |
|
|
|
|
|
|
|
|
| ||||||||
Danish krone | (213) |
| (0.5) |
| (1,420) |
| (3.4) |
|
| (22) |
| (0.1) |
| (319) |
| (0.8) |
|
Euro | (2,165) |
| (5.2) |
| (25,874) |
| (62.2) |
|
| (246) |
| (0.6) |
| (3,502) |
| (8.6) |
|
New Zealand dollar | - |
| - |
| (90) |
| (0.2) |
|
| - |
| - |
| (59) |
| (0.1) |
|
Norwegian krone | - |
| - |
| (21,219) |
| (51.0) |
|
| - |
| - |
| (7,393) |
| (18.1) |
|
US dollar | - |
| - |
| 6 |
| - |
|
| (20) |
| - |
| (1,159) |
| (2.8) |
|
Canadian dollar | (3) |
| - |
| (1,758) |
| (4.2) |
|
| - |
| - |
| - |
| - |
|
| (2,381) |
| (5.7) |
| (50,355) |
| (121.0) |
|
| (288) |
| (0.7) |
| (12,432) |
| (30.4) |
|
At 31 December 2020, the following rates were applied to convert foreign denominated assets into sterling: Danish krone (8.3158); euro (1.1172); New Zealand dollar (1.8986); Norwegian krone (11.7038); US dollar (1.3670) and Canadian dollar (1.7415).
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 (2019: 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 £350,000, 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 15% of HGT's net assets at the year-end are liquid resources and, in addition, HGT has an £200 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:
| 2020 |
| 2019 | ||||||||||||||
| Fixed and floating rate | Non | Total | Total |
| Fixed and floating rate | Non | Total | Total | ||||||||
| £000 | £000 | £000 | % |
| £000 | £000 | £000 | % | ||||||||
Sterling | 187,589 |
| 375,482 |
| 563,071 |
| 41.4 |
|
| 189,289 |
| 201,388 |
| 390,677 |
| 37.9 |
|
Euro | - |
| 386,450 |
| 386,450 |
| 28.4 |
|
| - |
| 247,475 |
| 247,475 |
| 24.0 |
|
Norwegian krone | - |
| 144,646 |
| 144,646 |
| 10.6 |
|
| - |
| 206,393 |
| 206,393 |
| 20.0 |
|
US dollar | - |
| 166,018 |
| 166,018 |
| 12.2 |
|
| - |
| 163,075 |
| 163,075 |
| 15.8 |
|
Danish krone | - |
| 21,525 |
| 21,525 |
| 1.6 |
|
| - |
| 22,440 |
| 22,440 |
| 2.2 |
|
New Zealand dollar | - |
| 948 |
| 948 |
| 0.1 |
|
| - |
| 1,508 |
| 1,508 |
| 0.1 |
|
Canadian dollar | - |
| 77,678 |
| 77,678 |
| 5.7 |
|
| - |
| - |
| - |
| - |
|
Total | 187,589 |
| 1,172,747 |
| 1,360,336 |
| 100.0 |
|
| 189,289 |
| 842,279 |
| 1,031,568 |
| 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:
| 2020 | 2019 | ||
| £000 | £000 | ||
Equity: |
|
| ||
Equity share capital | 10,400 |
| 10,186 |
|
Share premium | 219,722 |
| 194,774 |
|
Capital redemption reserve | 1,248 |
| 1,248 |
|
Retained earnings and other reserves | 1,059,646 |
| 833,090 |
|
Total capital | 1,291,016 |
| 1,039,298 |
|
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
| 2020 | 2019 | ||||||
No. 000 | £000 | No. 000 | £000 | |||||
Ordinary shares of 2.5p each: |
|
|
|
| ||||
Allotted, called up and fully paid: |
|
|
|
| ||||
At 1 January | 407,425 |
| 10,186 |
| 37,325 |
| 9,331 |
|
Sub-division of ordinary shares | - |
| - |
| 335,922 |
| - |
|
Issues of ordinary shares | 8,575 |
| 214 |
| 34,178 |
| 855 |
|
At 31 December | 416,000 |
| 10,400 |
| 407,425 |
| 10,186 |
|
Total called-up share capital | 416,000 |
| 10,400 |
| 407,425 |
| 10,186 |
|
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. Share issue costs incurred during the year were £254,167 (2019: 690,546). Total proceeds received from the issuance of shares during the year were £25,162,000 (2019: £75,261,000).
21. Share premium account and reserves
| Share | Capital redemption reserve | Capital reserve unrealised | Capital reserve realised | Revenue reserve | |||||
| £000 | £000 | £000 | £000 | £000 | |||||
As at 1 January 2020 | 194,774 |
| 1,248 |
| 264,953 |
| 544,601 |
| 23,536 |
|
Issues of ordinary shares | 24,948 |
| - |
| - |
| - |
| - |
|
Transfer on disposal of investments | - |
| - |
| (188,368) |
| 188,368 |
| - |
|
(Losses)/gains on liquidity funds | - |
| - |
| (2,238) |
| 2,117 |
| - |
|
(Losses)/gains on aborted deal fees | - |
| - |
| (2,084) |
| 548 |
| - |
|
Foreign exchange gain on loan facility | - |
| - |
| - |
| 224 |
| - |
|
Net movement on sale of fixed asset investments | - |
| - |
| - |
| 100,334 |
| - |
|
Net movement in unrealised appreciation of fixed asset investments | - |
| - |
| 197,342 |
| - |
| - |
|
Foreign exchange gain/(loss) on fixed asset investments | - |
| - |
| (2,288) |
| - |
| - |
|
Dividend paid | - |
| - |
| - |
| - |
| (20,399) |
|
Net revenue return | - |
| - |
| - |
| - |
| 16,809 |
|
Net loans recovered from General Partners | - |
| - |
| (3,176) |
| - |
| - |
|
Carried interest | - |
| - |
| (23,429) |
| (37,204) |
| - |
|
As at 31 December 2020 | 219,722 |
| 1,248 |
| 240,712 |
| 798,988 |
| 19,946 |
|
22. Commitment in fund partnerships and contingent liabilities
Fund | Original commitment | 1 | Outstanding at 31 Dec | |||||
| 2020 |
| 2019 | |||||
£000 |
| £000 |
| £000 | ||||
HGT Genesis 9 LP | 322,234 |
| 2 | 263,218 |
|
| - |
|
HGT Saturn 2 LP | 292,612 |
| 3 | 200,605 |
|
| - |
|
HGT Mercury 3 LP | 102,936 |
| 4 | 102,936 |
|
| - |
|
HGT Transition Capital LP | 75,000 |
|
| 49,600 |
|
| 59,122 |
|
HGT 8 LP | 350,000 |
|
| 9,709 |
|
| 143,542 |
|
HGT Saturn LP | 150,000 |
|
| 7,932 |
|
| 69,276 |
|
HGT Mercury 2 LP | 80,000 |
|
| 4,711 |
|
| 36,690 |
|
HgCapital Mercury D LP | 60,000 |
| 5 | 3,277 |
|
| 3,277 |
|
HGT 6 LP | 285,029 |
| 5 | 2,250 |
|
| 2,380 |
|
HGT LP | 120,000 |
| 5 | 1,261 |
|
| 1,261 |
|
HGT 7 LP | 200,000 |
| 5 | 1,232 |
|
| 19,979 |
|
Asper RPP I LP | 19,370 |
| 6 | 620 |
| 7 | 587 |
|
Hg 6 E LP | 15,000 |
| 5 | 118 |
|
| 118 |
|
Total outstanding commitments |
|
| 647,469 |
|
| 336,232 |
| |
1HGT has the benefit of an opt-out provision in connection with its commitments to invest alongside Hg Genesis 8, Hg Mercury 2, Hg Saturn, Transition Capital, Hg Saturn 2, Hg Genesis 9 and Hg Mercury 3 allowing it to opt out of its obligation to fund draw-downs under its commitments, without penalty, where certain conditions exist.
2Sterling equivalent of €360,000,000.
3Sterling equivalent of $400,000,000.
4Sterling equivalent of €115,000,000.
521.4% of the original £120 million commitment to the HgCapital 5 Fund, 5.5% of the original £300 million to the HgCapital 6 Fund, 7.6% of the £60 million to the Mercury 1 Fund and 12.4% of the original £200 million to the HgCapital 7 Fund have subsequently been cancelled, as the Manager deemed that it was unlikely to be required.
6Sterling equivalent of €21,640,000.
7Sterling equivalent of €692,000 (2019: €834,000).
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 134 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 12 March 2021.
24. Post balance sheet events
Since 31 December 2020, there have been no significant post balance sheet events.
Independent auditor's report
to the members of HgCapital Trust plc
The Company's financial statements for the year ended 31 December 2020 have been audited by Grant Thornton UK LLP. The text of the Auditor's Report can be found on pages 106 to 113 of the full annual report and accounts.
Extracts from full Annual Report and Accounts
The Directors present the Annual Report and Accounts of HgCapital Trust plc (HGT) (registered number 1525583) for the year ended 31 December 2020.
The Corporate Governance Report forms part of this Directors' Report on pages 115 to 122 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 10-12 in the full annual report and accounts.
Results and dividend
The total return after taxation for the year was £246,955,000 (2019: £177,494,000) of which the revenue return was £16,809,000 (2019: revenue return of £11,426,000). Following payment of an interim dividend of 2.0 pence per ordinary share in October 2020, the Directors recommend the payment of a final dividend of 3.0 pence per ordinary share for the year ended 31 December 2020, making a total of 5.0 pence (2019: 4.8 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 28 May 2021 to shareholders on the register of members at the close of business on 30 April 2021.
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 which 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 are 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 about the stewardship of investee companies by Hg can be found in their review on pages 25-81 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 or energy consumed 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, implementing the UK Government's policy on Streamlined Energy and Carbon Reporting. Information on our Manager's value chain carbon footprint can be found on page 41 of the full annual report and accounts, and online at www.hgcapital.com/responsibility.
Financial instruments
HGT had no outstanding derivative contracts at 31 December 2020. 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 will be held at the offices of Dickson Minto, at 16 Charlotte Square, Edinburgh, EH2 4DF on 11 May 2021 at 11.00am. At the time of writing, the UK remains subject to strict regulations regarding meetings. The Board would normally welcome the AGM as an opportunity to present to shareholders and listen to their questions in person. However, the health and safety of our Board, Manager and all shareholders is of paramount importance, as is complying with regulations. We have therefore decided that physical attendance at the AGM this year will not be possible. Arrangements will be made by HGT to ensure that the minimum number of shareholders required to form a quorum will attend the AGM, in order that the meeting may proceed to discuss the formal business of the meeting only.
Details of shareholder engagement and how to vote at this year's AGM are contained in the Notice of AGM on pages 148-155 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 15, as set out in the Notice of Meeting as they intend to do in respect of their own shareholdings.
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 116-117 of the full annual report and accounts, each confirm to the best of their knowledge that:
· 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, are 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
Jim Strang
Chairman
12 March 2021
Dividend
The final dividend proposed in respect of the year ended 31 December 2020 is 3.0p per share.
Ex-dividend date | 29 April 2021 |
Record date | 30 April 2021 |
Last date for registering DRIP instructions | 7 May 2021 |
Dividend payment date | 28 May 2021 |
The final dividend is subject to approval of the shareholders at the forthcoming AGM.
Directors:
Jim Strang
Richard Brooman
Peter Dunscombe
Pilar Junco
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 there, situated at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism
A copy of the Annual Report and Accounts, which includes the Notice of Annual General Meeting, will be delivered to shareholders shortly and can also be found at https://www.hgcapitaltrust.com/
END
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