Final Results
HG Capital Trust PLC
14 March 2006
For immediate release
HgCapital Trust plc
Preliminary announcement of results in respect of the year
ended 31 December 2005
HIGHLIGHTS
- NAV of £156.5m at 31 December 2005 (2004: £122.0m).
- NAV per share 621.3p at 31 December 2005 (2004: 484.5p).
- 30% total return (net assets plus dividend).
- 31% share price total return (share price with dividends reinvested)
versus the FTSE All-Share Index total return of 22%.
- 10 year total return performance of 13% per annum versus 6% per annum from
the FTSE All-Share Index.
- £1,000 invested 10 years ago would now be worth £5,486 (by comparison
£1,000 invested in the FTSE All-Share Index would now be worth £2,139).
- A record year for realisations, £52m received (2004: £47m).
- £35m invested, with increasing exposure to opportunities in Continental
Europe (2004: £22m).
- Dividend of 10.0p (2004: 8.0p).
- The NAV was 635.1p at 31 january 2006 and 646.2p at 28 February 2006.
Roger Mountford, the Chairman, comments:
'HgCapital Trust has rewarded investors over the past ten years and we believe it will continue to offer investors an
efficient vehicle with attractive long-term prospects for growth.
'Performance
'I am pleased to report that over the year to 31 December 2005 the Company's net asset value (NAV) grew by 28.2%, from
484.5p to 621.3p. The Company realised £52.4 million from realisation of investments and reinvested £35.4 million in
new and follow-on investments.
'The total return to shareholders (NAV plus dividend) over the year was 30%, compared with a return of 22% by both the
FTSE All-Share Index and the FTSE Small Cap Index. The share price of HgCapital Trust rose by 29.2% from 451.5p to
583.5p.
'Liquidity in the Company's shares has further improved and I am glad to report that the Company has continued to meet
all the qualifying criteria to remain a constituent of the FTSE All-Share Index.
'The Board is recommending a final dividend for the year of 10.0p per share (2004: 8.0), out of the revenue return of
11.8p (2004: 10.5p).
'Investment Strategy
'The Company's manager, HgCapital, is an experienced and successful manager of private equity investments, with a focus
on mid-market buy-outs in the UK and Continental Europe. Our Manager's strong performance was recognised by the
Company's selection as Private Equity Investment Trust of the Year in the Investment Week Awards. The Board
congratulates the Manager and all its staff for another year's good performance.
'The Company primarily invests directly in unquoted companies, alongside other funds managed by HgCapital.
'In recent years the Company has invested alongside HgCapital's MUST 4 Fund, which is now nearing the end of its
investment phase but will continue to offer opportunities for follow-on investment; the Company has recently agreed to
co-invest in new opportunities with HgCapital's new fund, Hg5. The Manager has limited the size of this fund to total
commitments of £830 million. The Board anticipates investing up to £120 million alongside this fund and that this will
provide the core of the Company's new portfolio over the next four years.
'In addition, the Manager has access to buy-out and development capital opportunities that fall outside the investment
parameters of Hg5 but which offer the Company attractive returns through co-investment with other clients of HgCapital.
'The Company has also committed €20 million to HgCapital's new Renewable Power Partners fund, which will invest in
projects generating, or associated with, power from renewable sources. The Manager believes that this area will provide
opportunities for attractive risk adjusted returns offering higher income than buy-outs. This small allocation will
complement the Company's core buy-out portfolio.
'While the Company's objective is to provide shareholders with long-term capital appreciation, the Board is always
mindful of shareholders' interests in income, in maintaining a liquid market in the Company's shares and avoiding the
shares trading at a discount to their net asset value.
'To fulfil the Company's objective the Board and HgCapital endeavour to keep the Company fully invested in high growth
opportunities, rather than grow funds under management for the sake of growth. Therefore, at a time when there appears
to be surplus capital and conditions for new investment appear to be unfavourable, the Board will consider returning
capital to shareholders, usually through market purchases of shares; accordingly, the Board is once again asking
shareholders at the forthcoming Annual General Meeting to renew the power to purchase shares in the market for
cancellation. When conditions for new investment appear more favourable the Board will retain cash to make new
investments.
'Prospects
'At the year end the Company's liquid resources awaiting reinvestment amounted to some £25 million, in addition to
which the Board has access to a bank facility of a further £25 million. The recent strength of listed equity markets
and takeover activity by financial and strategic purchasers has supported valuations in the portfolio and provided
opportunities to realise investments at favourable prices. However, this also affects entry values.
'While conditions for new investment may be more challenging than in recent years the credit markets offer strong
support for leveraged purchases and accordingly HgCapital believe that good value can still be found. The Board
continues to believe strongly that an allocation to private equity merits a place in many portfolios and it is
particularly suited to the patient investor who is willing to take a five year view. Hg Capital Trust has rewarded
investors over the past ten years and we believe it will continue to offer investors an efficient vehicle with
attractive long-term prospects for growth.'
Performance record
Year ended Net assets Net asset Ordinary Gross Revenue available Earnings per Dividends
31 attributable to value per share revenue for ordinary ordinary per
December ordinary ordinary share price £'000 shareholders share ordinary
shareholders p p £'000 p share
£'000 p
1995 49,029 189.1 140.0 2,948 1,478 5.7 4.50
1996 60,313 232.6 176.0 2,717 1,276 4.9 4.50
1997 66,796 257.6 193.0 3,563 1,688 6.5 4.95
1998 66,851 257.8 208.0 2,495 1,359 5.2 4.95
1999 89,863 346.5 289.0 3,901 2,481 9.6 8.00
2000 103,521 411.0 356.5 7,332 4,623 17.9 14.50
2001 95,795 380.3 294.0 3,893 2,420 9.6 8.00
2002 83,837 332.9 219.5 3,528 2,148 8.5 8.00
2003 99,987* 397.0* 289.5 7,106 3,969 15.8 -*
2004 122,040* 484.5* 451.5 4,905 2,649 10.5 12.00*
2005 156,487 621.3 583.5 4,963 2,965 11.8 8.00**
*Restated: See note 1.
**Final dividend for the year ended 31 December 2004, declared on 8 March 2005, paid on 29 April 2005.
Historical total return+ performance
One year Three years Five years Seven years Ten years
% pa % pa % pa % pa % pa
Share price 31.3 42.8 13.8 19.3 12.9
Net asset value 30.4 25.1 10.6 15.7 10.4
FTSE All-Share Index 22.0 18.5 2.2 3.9 5.6
FTSE Small Cap Index 22.4 24.9 3.2 9.6 5.8
Based on the Company's share price at 31 December 2005 and allowing for dividends to be reinvested, an
investment of £1,000 ten years ago would now be worth £5,486. By comparison £1,000 invested in the FTSE
All-Share Index would be worth £2,139.
+Total return assumes all dividends have been reinvested.
Investment Manager's Review
2005 was a record year for realisations and the portfolio continues to perform strongly.
Attribution analysis of current year movements in net asset value £'000
Opening net asset value as at 1 January 2005 122,040
Gross revenue 4,963
Expenditure (2,846)
Taxation (385)
Dividend paid (2,015)
Realised proceeds in excess of 31 December 2004 book value (excludes gross revenue) 14,725
Net unrealised appreciation of investments 22,981
Carried interest (2,976)
Closing net asset value as at 31 December 2005 156,487
Realised and unrealised movements in net asset value during 2005
Realised Unrealised
Proceeds* Appreciation**
Total
£'m £'m
£'m
Castlebeck - 7.6 7.6
FTE Automotive 6.4 - 6.4
Raymarine 3.0 1.7 4.7
Tunstall 4.6 - 4.6
Xtx (Xyratex) - 4.4 4.4
Travelsphere - 3.1 3.1
ClinPhone - 2.8 2.8
Blue Minerva - 2.3 2.3
PBR - 1.9 1.9
Trados 1.4 - 1.4
Hirschmann - 1.3 1.3
Others 0.6 0.3 0.9
Verigen (1.3) - (1.3)
Eagle Rock - (2.4) (2.4)
Total 14.7 23.0 37.7
*Realised proceeds in excess of 31 December 2004 book value (excludes gross revenue) £'m
**Net unrealised appreciation of investments £'m
The Company invests alongside other clients of HgCapital. Typically, the Company's holding forms part of a much larger
stake in buy-out and expansion capital investments of between £50 and £350 million enterprise value (EV), controlled by
HgCapital. The Investment Manager's Review generally refers to each transaction in its entirety, apart from the tables
which detail the Company's participation, and where it specifically says otherwise.
The Company's net asset value increased from £122 million to £156 million during the year. This arose from unrealised
movements and realised proceeds in excess of the book value of £23.0 million and £14.7 million respectively. Value
growth is a result of strong earnings growth and cash generation within the portfolio, as well as a good flow of
realisations.
During the year we recapitalised the Company's investments in Castlebeck, ClinPhone and Blue Minerva, each having
achieved strong year-on-year profit growth. Travelsphere, PBR and Hirschmann also demonstrated an increase in profits
and value, whilst the quoted share prices of Raymarine and Xyratex increased over the course of the year. We realised
investments in FTE Automotive, Tunstall and Trados at a significant premium to their carrying value.
The majority of the Company's investments performed strongly, however, Eagle Rock experienced trading difficulties
during the latter half of 2005 and has been written down in value accordingly. The Company also sold its interest in
Verigen earlier in the year for a loss at completion but with the potential to recover some value from future milestone
and royalty payments.
During the year, the Company invested a total of £35 million (2004: £22 million) and participated in five new buy-out
investments across our investment geographies. These new investments were made in Elite (Netherlands, €78 million EV),
Addison (Germany, €78 million EV), Sporting Index (UK, £76 million EV), Hofmann (Germany, €138 million EV) and Schenck
(Germany, €205 million EV). In addition, a second investment was made in the renewable energy sector with €0.8 million
committed to Donegal Wind Ltd (Sorne Wind Farm, Northern Ireland); the funds for this investment will not be invested
until the second quarter of 2006.
The Company realised record proceeds during the year, amounting to £52 million (2004: £47 million). These proceeds
arose principally from the sale of FTE Automotive and Tunstall as well as a partial sale of Raymarine.
A diversified portfolio, invested along sector lines, with an increasing exposure to Continental Europe
At the end of 2005 the Company held a portfolio of 44 investments (2004: 46), of which the twenty principal investments
represented nearly 90% of the portfolio's value.
This portfolio of fast growing small cap stocks offers both sector and geographic diversification in a portfolio. The
top 20 investments in aggregate are growing both revenues and profits in excess of 20% per annum. The portfolio's
valuation increased over the year to £128 million, benefiting from strong profit growth and positive cash flow.
Five new investments were made during the year; all were management buy-outs. Four of the investments were in companies
based in Germany and the Netherlands, in line with HgCapital's investment strategy to increase the Company's exposure
to investment opportunities in Continental Europe. In addition a new investment was made in a wind farm in Northern
Ireland as part of HgCapital's expanded investment strategy to include renewable energy projects.
Eight investments were fully realised and thirteen were partially realised. In addition, deferred sale proceeds
amounting to £0.6 million were received from PII Group, which was sold in 2002. In aggregate, capital proceeds from
these realisations produced a 45% uplift over carrying value and a 114% uplift over cost.
Proceeds from realisations resulted in the Company ending the year with £25.4 million of liquid resources. Combined
with a £25 million borrowing facility these resources leave the Company well positioned to exploit new investment
opportunities and to support the growth of existing investments.
Asset class Geographic spread
Unquoted 70% UK 64%
Cash and other assets 18% Germany 26%
Quoted 12% Benelux 7%
US 2%
Ireland 1%
Valuation basis Deal type
Cost 37% Buy-out 86%
Earnings 27% Expansion 10%
Quoted 15% Fund 2%
Written down 15% Venture 2%
Third-party transaction 4%
Net assets 2%
Sector by valuation Vintage by valuation
Technology 30% 2005 25%
Industrials 20% 2004 14%
Healthcare 18% 2003 25%
Leisure 15% 2002 10%
Media 10% 2001 6%
Consumer 4% 2000 7%
Fund 2% Pre-2000 13%
Renewable energy 1%
Percentages shown are by value
Investments
During 2005 HgCapital invested a total of £173 million on behalf of its clients, including £35.4 million on behalf of
the Company.
Company Sector Activity Deal Type Cost
£'000
Schenck Industrials Industrial measuring and Buy-out 9,326
weighing systems
Addison Technology Accounting and business Buy-out 6,499
software
Elite Technology Digital short-range wireless Buy-out 5,749
chip sets
Sporting Index Leisure Spread betting and online Buy-out 5,428
betting
Hofmann M.M. Industrials Frozen food products and Buy-out 4,747
related on-site catering
Donegal Wind Renewables Wind Farm Expansion -*
New investments 31,749
The Sanctuary Spa Consumer Day health spa and beauty Expansion 2,461
products
Clarion Events Media Exhibition organiser Buy-out 709
Other 457
Further investments 3,627
Total investment by the Company 35,376
*€0.8 million has been committed but will not be drawn until the second quarter of 2006.
Figures below refer to the total size of each acquisition, including debt raised from third parties, made by HgCapital
on behalf of its clients, including the Company.
Schenck
In December 2005, HgCapital completed the €205 million buy-out of Schenck. Schenck is the global market leader for
high-tech applications and solutions in industrial weighing, feeding and automation. Schenck develops, manufactures,
assembles, markets and sells a full range of solutions, products and turnkey systems on the basis of reliable
components, combining process-engineering expertise and field-proven technology.
Addison
The €78 million buy-out of Addison was completed in June 2005. Addison is a leading, privately-owned German application
software company that provides business-critical solutions to two related markets: tax accountants and small and medium
sized enterprises (SMEs). It develops, licenses and manages standard and sector specific software for book keeping,
accounts production, tax, cost accounting, payroll administration and financial controls.
Elite
The $74 million buy-out of the digital cordless business unit of National Semiconductor Corporation was completed in
June 2005. Elite designs chip sets targeted primarily for the home wireless voice and data applications market. Its
products include baseband and radio transceivers for cordless digital enhanced telephony and voice over internet
protocol telephones and base stations, as well as cordless gamepads and cordless voice modules.
Sporting Index
The £75.8 million buy-out of Sporting Index was completed in November 2005. Founded in 1992, Sporting Index is the
recognised leader in sports spread betting, with a market share of approximately 70% in the UK. It is also the only
sports spread betting company to offer continuous 24 hour betting and sports spread betting on Sky TV.
Hofmann M.M.
In November 2005, HgCapital completed the buy-out of Hofmann for a consideration of €138 million. Hofmann is a
market-leading provider of frozen food products for the industrial and commercial markets. Customers include small
business canteens and social organisations in Germany. Hofmann differentiates itself from its competition through a
focus on quality and a wide choice of healthy and tasty menus.
Donegal Wind
HgCapital has committed €4 million to the €41 million construction project, Donegal Wind in County Donegal, Northern
Ireland. The commitment will be funded in the second quarter of 2006.
Further Investments
In July 2005 a further investment was made in The Sanctuary Spa, a single site health spa situated in Covent Garden and
owned by HgCapital's clients since November 1995. In July 2005 the Spa acquired The Sanctuary Connections, bringing The
Sanctuary branded beauty products business in house.
Other
Over this period a further investment was made of £4.2 million to finance an acquisition by Clarion Events. Addison
invested in the follow-on acquisition of PBSG for a consideration of €14 million. We also made several small further
investments into Newchurch, Hoseasons, and UK Wind.
Realisations
During 2005 HgCapital realised total proceeds of £307 million on behalf of its clients, including £52.4 million on
behalf of the Company.
Company Sector Exit route Cost Proceeds+ 2005
return+
£'000 £'000
£'000
Tunstall Healthcare Financial 6,998 16,225 9,227
FTE Automotive Industrials Financial - 13,492 13,492
Trados Technology Trade sale 2,492 2,299 (193)
Bottomline Technologies** Technology Quoted share sale 952 1,899 947
Other*** 4,138 897 (3,241)
Full realisations 14,580 34,812 20,232
Raymarine* Consumer Quoted share sale 126 6,653 6,527
Blue Minerva Technology Recapitalisation 3,669 4,160 491
Castlebeck Healthcare Recapitalisation 2,870 3,794 924
ClinPhone Healthcare Recapitalisation 1,276 1,460 184
Other 309 1,514 1,205
Partial realisations 8,250 17,581 9,331
Total realisations 22,830 52,393 29,563
+ Includes gross revenue received during the year.
* Listed on the London Stock Exchange.
** Traded on NASDAQ.
*** Includes entities liquidated during the year which had previously been written down.
Tunstall
Tunstall is Europe's leading supplier of personal and home reassurance systems. In August 2005 we completed the
realisation of our investment in Tunstall with a sale of the business to Bridgepoint Capital. This investment has
returned 2.7 times the original investment cost.
FTE Automotive
FTE Automotive is the world market leader for clutch and brake actuation systems. In May 2005 we completed the sale of
FTE Automotive to PAI Partners. This sale represented a return of 3.7 times the original investment cost.
Trados
In July 2005 we realised our investment in Trados by selling the company to SDL plc, a UK listed company. The return
represented 0.9 times the original investment, realising a small loss.
Bottomline Technologies
We sold our residual holding of quoted shares in Bottomline Technologies in July. This represented a multiple of 1.9
times our original investment cost.
Euroknights International
Euroknights, a European private equity fund, completed its realisation phase and has been liquidated.
Global People Network
The Company was placed into administration in 2004, and was struck off the Register in 2005.
MedNova
MedNova was sold to Abbott Laboratories on a milestone and royalty structure basis in October 2005. At completion the
Company received £0.1 million, with further royalty payments due until 2009 as further approvals are achieved.
Verigen AG
Verigen was sold to the Genzyme Corporation in February 2005. Proceeds are currently being held in escrow and further
milestone payments and royalties are anticipated.
PII Group
The Company received £0.7 million of deferred consideration (against a book value of nil), bringing the overall return
to 3.7 times the original investment cost.
Partial realisations
Following the flotation of Raymarine in December 2004, the share price has performed strongly, rising from £1.52 to
£2.40. During the year the Company realised an additional £6.7 million. To date, this investment has made a return of
4.3 times the original investment cost (including the unrealised value).
Following strong earnings growth, we recapitalised Castlebeck, Blue Minerva and ClinPhone during the year.
Investment Listing of the Company
Company Sector Location Residual Valuation Year of Portfolio Cum.
cost investment value value
£'000 £'000 % %
Xtx Ltd Technology UK 6,995 14,775 2003 11.5 11.5
(Xyratex) **
Castlebeck Healthcare UK 861 10,113 2002 7.9 19.4
Group Ltd +
Schenck MPT Industrials Germany 9,326 9,390 2005 7.3 26.7
SA+
Travelsphere Leisure UK 3,899 7,157 2000 5.6 32.3
Holdings Ltd
W.E.T. Industrials Germany 7,590 6,757 2003 5.3 37.6
Holding
(Luxembourg)
SA +
Addison Technology Germany 6,499 6,637 2005 5.2 42.8
Luxembourg SA
+
Elite Holding Technology Netherlands 5,749 6,089 2005 4.7 47.5
SA +
Classic Media UK 6,033 6,033 2003 4.7 52.2
Copyright
(Holdings)
Ltd t/a
Boosey &
Hawkes +
Sporting Leisure UK 5,428 5,428 2005 4.2 56.4
Index Group
Ltd +
Blue Minerva Technology UK 2,957 5,251 2004 4.1 60.5
Ltd t/a IRIS
Software +
Castlegate Healthcare UK 1,085 5,191 1996 4.0 64.5
211 Ltd t/a
ClinPhone
Clarion Media UK 4,965 4,965 2004 3.9 68.4
Events Ltd +
Hofmann M.M. Industrials Germany 4,747 4,765 2005 3.7 72.1
SA +
The Sanctuary Leisure UK 2,579 4,251 1995 3.3 75.4
Spa Holdings
Ltd +
Hirschmann Industrials Germany 2,669 4,108 2004 3.2 78.6
Electronics
Holdings SA +
Raymarine plc Consumer UK 61 3,518 2001 2.7 81.3
*
PBR Holding Healthcare Netherlands 4,973 3,227 2002 2.5 83.8
SA +
Rolfe & Nolan Technology UK 238 2,619 2003 2.0 85.8
Holdings plc
+
Match Healthcare UK 3,854 2,284 1999 1.8 87.6
Holdings Ltd
Hoseasons Leisure UK 2,197 1,929 2003 1.5 89.1
Group Ltd+
Doc M SARL Healthcare Germany 1,956 1,893 2004 1.5 90.6
Eagle Rock Media UK 3,856 1,833 2001 1.4 92.0
Entertainment
Ltd +
Axiom Technology UK 1,721 1,721 2001 1.3 93.3
Holdings Ltd
Weston Fund US 2,260 1,706 1998 1.3 94.6
Presidio
Capital III,
LP
UK Wind Renewables UK 1,375 1,375 2004 1.1 95.7
Holdings Ltd
+
Bertram Group Consumer UK 2,848 1,248 1999 1.0 96.7
Holdings Ltd
+
Worldmark Industrials UK 2,389 1,001 2000 0.8 97.5
International
Ltd
Orbiscom Ltd Technology Ireland 3,063 661 2001 0.6 98.1
+
South Wharf Industrials Ireland 47 422 1992 0.3 98.4
plc ^
Euroknights Fund Europe 1,436 385 1996 0.3 98.7
III LP Other
Wand Equity Fund US 593 344 1998 0.3 99.0
Portfolio II
LP
Burns Technology UK 3,245 343 2001 0.3 99.3
e-Commerce
Solutions +
Newchurch Healthcare UK 2,417 319 2000 0.3 99.6
Ltd +
PARC Group Other Ireland 46 304 1995 0.2 99.8
Ltd
Weston Fund US - 95 1995 0.1 99.9
Presidio
Capital II,
LP
ACT Venture Fund Ireland - 82 1994 0.1 100.0
Capital Ltd
Orbis plc* Other UK 3,378 21 1997 0.0 100.0
Donegal Wind Renewables Ireland - - 2005 0.0 100.0
Ltd ++
Acuid Ltd Technology UK 4,450 - 2001 0.0 100.0
SGI Holdings Other UK 2,297 - 1999 0.0 100.0
Ltd +
Profiad Ltd + Healthcare UK 1,653 - 1999 0.0 100.0
Biovector Healthcare Europe 998 - 1997 0.0 100.0
Therapeutics Other
SA
Azinger Ltd Other Ireland 211 - 1993 0.0 100.0
Luxfer Industrials UK 46 - 1996 0.0 100.0
Holdings plc
Total 122,990 128,240 100.0
* Listed on the London Stock Exchange
^ Listed on the London and Dublin Stock Exchanges
** Traded on NASDAQ
+ HgCapital, through its management of the Company and other funds, controls more
than 50% of the voting equity shares
++ €0.8 million has been committed but will not be drawn until the second quarter
of 2006
Investing in Private Equity
The top performing asset class of the last decade.
Private Equity
Private equity describes securities issued by private and unlisted companies. The securities are equity and
equity related enjoying the full risks and rewards of ownership. Investments can be in early stage
businesses, expansion capital in profitable growing businesses and can be used to finance management or
leveraged buy-outs of mature businesses.
The objective is to achieve higher returns than public equity over a rolling period of 5-10 years.
Investments are typically held for 3-7 years and are liquidated after an initial public offering or a trade
sale.
Investment profile
Private equity investments are less liquid than public equities. To compensate for these features they
offer more attractive returns. Over the last ten years, total UK private equity funds outperformed the UK
WM All Funds Universe** by over 6% p.a. and outperformed every asset class over this period*.
The risk profile of an individual private equity investment depends on many factors; the principal ones are
the nature of the business, the maturity and stage of the business, its size and the financial structure of
the balance sheet. A diversified portfolio helps mitigate some of these risks; more important mitigants are
the quality of company stock selections by the private equity manager and the quality of the management
teams running the company.
Advantages of Private Equity
Compared with investment in the public markets, a private equity investor has significant advantages:
• More investment opportunities: more than 100,000 companies compared with approximately 2,500 listed
companies in Europe
• Better access to information: the ability to conduct detailed market, financial, legal and management
due diligence typically over 8 to 20 weeks before investing
• More control: the private equity manager has control over the timing of a sale of the business
• Alignment of interest of owners and management leads to better decision making: the ability to act
like an owner rather than an agent (fund manager), with the benefit of representation on the board
• Attracts management talent: the ability to attract high-calibre management and the alignment of
management's interests to the success of the investment through management's equity participation.
* Source: BVCA Performance Measurement Survey 2004.
** The WM All Funds Universe is the largest available universe of UK Pension Funds.
It represents some two-thirds of the UK defined benefit pension industry by value.
Private Equity Investment Trusts
A private equity investment trust offers the opportunity to participate in a diversified portfolio of
mainly unlisted companies that are generally valued at a discount to their quoted peers.
By buying shares in an investment trust, which are freely traded, the investor also benefits from liquidity
in the shares of the trust while also participating in the superior returns of a private equity portfolio.
The Company's objective is to provide shareholders with long term capital appreciation rather than dividend
growth. To maintain its status as an investment trust it is obliged to distribute a proportion of its
income by way of dividend each year. Dividends are declared each year based on the earnings after tax in
that year. Unquoted investments are run for capital gain not income. Accordingly the earnings of the share
and dividend per share of a private equity investment trust will tend to fluctuate over time.
A private equity trust should not be confused with a Venture Capital Trust (VCT) which offers tax
advantages to certain investors. However, they are required to invest in small, early stage and hence more
risky ventures.
Advantages of investment via an investment trust
Investors may invest in private equity via limited partnerships. These have a ten year lock in and require
significant minimum commitment from investors. Investment trusts offer investors liquidity in their shares
so an investor can trade the shares in variable bargain sizes and at any time.
Share price
The major driver of a private equity investment trust's share price is Net Asset Value (NAV), whose growth
is driven by realisations and by revaluation of the unrealised portfolio. Revaluations depend on the rate
of profit growth for the underlying investments and market ratings for the companies.
The share price of investment trusts usually tracks NAV; however, they can trade on a premium or discount
to NAV depending on the market's view of future realisations and new investments, and the investment
strategy of the manager.
Although not all investment trusts will provide high returns, the selection of a strong manager with a
carefully thought out investment strategy that offers a diversified portfolio of companies, across a number
of industrial sectors and geographies, can increase the likelihood of success and reward the patient
investor.
Investment Manager's Strategy
To maximise returns from mid-market private equity through sector specialisation, with the deep resources required to
support active management of the portfolio.
OUR STRATEGY
Mid-market
HgCapital concentrates on mid-market buy-outs with enterprise values of between £50 million and £350
million.
This market comprises a high volume of companies with proven, reliable track records and defensible market
positions.
Companies in this range are small enough to provide opportunities to drive incremental value through
organisational changes and operational improvements, but large enough to attract quality management and
offer multiple exit options.
Pan-regional
We focus on the first, second and fourth largest European markets, namely the UK, Germany and the Benelux
region. Our network of local offices, combined with centralised investment and portfolio committees
optimise our ability to drive strong performance.
Broad coverage
HgCapital's dedicated sector teams continue to provide investors with exposure to the substantial majority
of private equity activity in HgCapital's target sizes and geographies.
Clear investment criteria
When evaluating an investment opportunity, HgCapital applies a rigorous yet commercial investment selection
process. This process governs all investment decisions, with the goal of ensuring that only the most
attractive investments are completed, irrespective of an opportunity's sector or geography.
We look for the following criteria in all of our investments:
• strong management team or the possibility to replace the existing team with management selected by
HgCapital
• leading market positions in growth markets with high barriers to entry
• performance improvement and/or consolidation opportunities
• innovative businesses with stable and proven track record.
OUR TACTICS
Sector specialisation
Well resourced sector teams seek to combine the domain knowledge and expertise of a strategic buyer with
the flexibility of a financial buyer.
Our sector teams (Consumer, Healthcare, Industrials, Leisure, Media, Technology and Services) share a
similar top-down approach to screening their respective industries.
By leveraging on our sector knowledge, we can concentrate our resources on converting prime opportunities
and avoid spending time on transactions of less interest or value.
Active portfolio management
We undertake intensive, continuous, informed interaction with our portfolio companies through dedicated
portfolio management executives to develop, execute and monitor value enhancement strategies for each of
our investments.
HgCapital will typically invest as the lead, controlling owner of its portfolio companies as part of its
hands-on approach to managing portfolio companies. We appoint HgCapital executives to our companies'
boards, to participate in business planning and work with management when needed.
To monitor and analyse our portfolio companies throughout the investment's life cycle, we operate a
Portfolio Review Committee which meets on a monthly basis to discuss our investments' performance, with
particular attention given to recent investments, underperforming investments or investments scheduled for
exit.
Deep resources
We invest substantially in all areas of our business to ensure high quality resources can be applied to
each aspect of an investment opportunity.
Our team of over 60 people is well positioned to produce high absolute returns over the long term from a
well-diversified portfolio of investments, which we believe will continue to be superior to the returns
generated by comparable public equity markets.
For further information please contact:
Roger Mountford - Chairman, HgCapital Trust plc
Tel: 07799 662601
Ian Armitage - Chief Executive, HgCapital
Tel: 020 7089 7979
Peter Ogden - The Maitland Consultancy
Tel: 020 7395 0422
INCOME STATEMENT
for the year ended 31 December 2005
Revenue return
2005 2004*
£'000 £'000
Note
Gains on investments and government securities - -
Carried interest 4(b) - -
Income 3 4,963 4,905
Investment management fee 4(a) (587) (604)
Other expenses 5 (498) (484)
---------- ----------
Net return before finance costs and taxation 3,878 3,817
Finance costs - (110)
---------- ----------
Return on ordinary activities before taxation 3,878 3,707
Taxation on ordinary activities (913) (1,058)
---------- ----------
Transfer to reserves 2,965 2,649
---------- ----------
Return per ordinary share 11.77p 10.52p
====== ======
*Restated - see note 1 of the financial statements.
INCOME STATEMENT - continued
for the year ended 31 December 2005
Capital return
2005 2004
£'000 £'000
Note
Gains on investments and government securities 37,706 23,925
Carried interest 4(b) (2,976) -
Income 3 - -
Investment management fee 4(a) (1,761) (1,812)
Other expenses - -
---------- ----------
Net return before finance costs and taxation 32,969 22,113
Finance costs - (329)
---------- ----------
Return on ordinary activities before taxation 32,969 21,784
Taxation on ordinary activities 528 642
---------- ----------
Transfer to reserves 33,497 22,426
---------- ----------
Return per ordinary share 132.99p 89.04p
====== ======
INCOME STATEMENT - continued
for the year ended 31 December 2005
Total return
2005 2004*
£'000 £'000
Note
Gains on investments and government securities 37,706 23,925
Carried interest 4(b) (2,976) -
Income 3 4,963 4,905
Investment management fee 4(a) (2,348) (2,416)
Other expenses 5 (498) (484)
---------- ----------
Net return before finance costs and taxation 36,847 25,930
Finance costs - (439)
---------- ----------
Return on ordinary activities before taxation 36,847 25,491
Taxation on ordinary activities (385) (416)
---------- ----------
Transfer to reserves 36,462 25,075
---------- ----------
Return per ordinary share 144.76p 99.56p
====== ======
The total column of this statement represents the Company's Income Statement. The supplementary revenue and capital
return columns are prepared under guidance published by the Association of Investment Trust Companies. All recognised
gains and losses are disclosed in the Revenue and the Capital columns of the Income Statement and as a consequence no
Statement of Total Recognised Gains and Losses has been presented.
All revenue and capital items in the above statement derive from continuing operations.
No operations were acquired or discontinued during the year.
*Restated - see note 1 of the financial statements.
BALANCE SHEET
as at 31 December 2005
31 December 31 December
2005 2004*
£'000 £'000
(audited) (audited)
Fixed assets
Investments held at fair value
- Quoted at market valuation 18,736 17,630
- Unquoted at directors' valuation 109,504 85,642
128,240 103,272
Current assets
Debtors 6,609 6,808
Government securities 24,515 11,884
Cash 867 1,180
31,991 19,872
Creditors - amounts falling due within one year (3,744) (1,104)
Net current assets 28,247 18,768
Net assets 156,487 122,040
Capital and reserves
Called up share capital 6,296 6,296
Share premium account 14,123 14,123
Capital redemption reserve 1,248 1,248
Capital reserve - realised 122,191 100,834
Capital reserve - unrealised 4,933 (7,207)
Revenue reserve 7,696 6,746
Total equity shareholders' funds 156,487 122,040
Net asset value per ordinary share 621.3p 484.5p
*Restated - see note 1 of the financial statements.
CASH FLOW STATEMENT
for the year ended 31 December 2005
2005 2004
£'000 £'000
(audited) (audited)
Net cash inflow from operating activities 1,542 4,586
Returns on investment and servicing of finance - (439)
Taxation received/(paid) 352 (1,604)
Capital expenditure and financial investment
Purchase of fixed asset investments (35,376) (21,937)
Proceeds from the sale of fixed asset investments 48,831 38,153
Net cash inflow from capital expenditure and financial
investment 13,455 16,216
Dividends paid (2,015) (3,022)
Net cash inflow before management of liquid resources 13,334 15,737
Management of liquid resources
Purchase of government securities (50,890) (11,620)
Sale/redemption of government securities 37,246 17
Net cash outflow from management of liquid resources (13,644) (11,603)
Net cash outflow from repayment of loans - (3,500)
(Decrease)/increase in cash in the period (310) 634
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
for the year ended 31 December 2005
Share Share Capital Capital Revenue Total
capital premium redemption reserves reserves
account reserve
£'000 £'000 £'000 £'000 £'000 £'000
At 31 December 2004
(as restated see note (1)) 6,296 14,123 1,248 93,627 6,746 122,040
Net return from ordinary - - - 33,497 2,965 36,462
activities
Dividends paid* - - - - (2,015) (2,015)
--------- --------- ----------- ------------ ----------- ------------
At 31 December 2005 6,296 14,123 1,248 127,124 7,696 156,487
===== ===== ====== ======= ====== =======
At 31 December 2003
(as restated see note (1)) 6,296 14,123 1,248 71,201 7,119 99,987
Net return from ordinary - - - 22,426 2,649 25,075
activities
Dividends paid** - - - - (3,022) (3,022)
--------- --------- ---------- ------------ ---------- ------------
At 31 December 2004 6,296 14,123 1,248 93,627 6,746 122,040
===== ===== ===== ======= ===== =======
* Final dividend for the year ended 31 December 2004 of 8p (£2,015,000) declared on 8 March 2005, paid on 29
April 2005.
** Final dividend for the year ended 31 December 2003 of 12p (£3,022,000) declared on 10 March 2004, paid on
30 April 2004.
NOTES ON THE PRELIMINARY RESULTS
1. Principal activity
The principal activity of the Company is that of an investment company within the meaning of
section 266 of the Companies Act 1985.
2. Basis of preparation
The accounts have been prepared under the historical cost convention, modified to include the
revaluation of investments and in accordance with UK Generally Accepted Accounting Practices (UK
GAAP) and with the Statement of Recommended Practice 'Financial Statements of Investment Trust
Companies' ('SORP') issued in December 2005. All of the Company's operations are of a continuing
nature.
Investment income and interest receivable
Income from 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 the Company elects to
receive dividends in the form of additional shares rather than cash dividend, the equivalent of
the cash dividend is recognised as income in the revenue account and any excess in value of the
shares received over the amount of the cash dividend is recognised in capital reserve - realised.
Interest income is accounted for on an accruals basis. Dividends receivable on equity shares
where there is no ex-dividend date and on non-equity shares are brought into account when the
Company's right to receive payment is established.
Management fee and finance costs
The annual investment management fee and finance costs are charged 75% to capital reserve -
realised and 25% to the revenue account. This is in line with a prudent split of expected
long-term returns, in the form of capital gains and income respectively, from the investment
portfolio of the Company.
Expenses
All expenses are accounted for on an accruals basis. All administrative expenses, excluding the
management fee and finance costs, are charged wholly to the revenue account.
Expenses which are incidental to the purchase or sale of an investment are included within the
cost or deducted from the proceeds of the investment.
Investments
The general principle applied is that investments should be reported at 'fair value' in
accordance with the joint British Venture Capital Association (BVCA) and European Venture Capital
Association (EVCA) guidelines issued in February 2005.
Quoted:
Prior to 1 January 2005, investments were valued at middle market prices with a marketability
discount being applied. Following the introduction of FRS 26 - Financial instruments: Recognition
and Measurement, quoted investments are now designated as held at fair value deemed to be bid
market prices. In accordance with the exemption conferred by FRS 26 comparatives have not been
restated for this change in accounting
policy and therefore quoted investments shown at 31 December 2004 are stated at middle market
prices.
The effect of this change is to increase value of listed investments at 31 December 2005 and
increase net return on ordinary activities after taxation for the year ended 31 December 2005 by
£895,000.
Unquoted:
Unquoted investments are valued using the following criteria:
(i) initially, investments are valued at cost, including fees and transaction costs;
(ii) after the receipt of the first audited financial statements following initial investment,
companies are valued on the level of maintainable earnings and an appropriate earnings
multiple. A marketability discount is applied to the value attributable to shareholders,
ranging from 20% to 30%.
(iii) where more appropriate, investments are valued by reference to their net assets rather
than earnings; and
(iv) appropriate provisions are made against all individual valuations where necessary to
reflect unsatisfactory financial performance leading to diminution in value.
Both realised and unrealised gains and losses arising on investments are taken to capital
reserves.
Dividend
Under FRS21 - Events after the Balance Sheet Date - dividends should not be accrued in the
financial statements unless they have been declared and approved by shareholders before the
Balance Sheet date. Dividends payable to equity shareholders are recognised in the Reconciliation
of movements in shareholders' funds when they have been approved by shareholders and become a
liability of the Company.
It is intended that dividends will be declared and paid annually in respect of each accounting
period. Dividends of 12p and 8p per share, declared as final dividends, were paid on 30 April
2004 and 29 April 2005 in respect of the years ended 31 December 2003 and 31 December 2004. A
dividend of 10.0p is proposed for the year ended 31 December 2005 payable on 2 May 2006 to
shareholders on the Register on 24 March 2006. In accordance with UK GAAP this dividend has not
been accrued in the financial statements to the year ended 31 December 2005.
Restatement in respect of final dividend
a) Reconciliation of movements in shareholders' funds
In accordance with the above, the Reconciliation of movements in shareholders' funds for
the year ended 31 December 2004 now reflects the payment of the final dividend for 2003 of
12p per ordinary share (£3,022,000) and the Reconciliation of movements in shareholders'
funds for the year ended 31 December 2005 now reflects the payment of the final dividend
for 2004 of 8p (£2,015,000) which are now recognised in the period in which they are
declared and approved by shareholders.
b) Balance Sheet
31 December 2004 31 December 2003
Per ordinary Per ordinary
£'000's share £000's share
Net Assets as at 31 December as
previously stated 120,025 476.5p 96,965 385.0p
Add back final dividend declared 2,015 8.0p 3,022 12.0p
Restated Net Assets as at 31 December 122,040 484.5p 99,987 397.0p
3. Income 2005 2004
£'000 £'000
Income from investments
UK unquoted investment income 2,251 4,550
UK dividends 833 -
Overseas dividends 18 172
3,102 4,722
Other income
Gilt interest 1,692 34
Deposit interest 146 61
Underwriting commission 23 88
1,861 183
Total income 4,963 4,905
Total income comprises:
Dividends 851 172
Interest 4,089 4,645
Underwriting commission 23 88
4,963 4,905
4. a) Investment management fee
Revenue Capital Total
return return return
2005 2004 2005 2004 2005 2004
£'000 £'000 £'000 £'000 £'000 £'000
Investment management fee 500 514 1,499 1,542 1,999 2,056
Irrecoverable VAT thereon 87 90 262 270 349 360
587 604 1,761 1,812 2,348 2,416
The investment management fee is levied quarterly in arrears. Investment management fees are charged 75% to capital
and 25% to revenue.
b) Carried interest
Revenue Capital Total
return return return
2005 2004 2005 2004 2005 2004
£'000 £'000 £'000 £'000 £'000 £'000
Carried interest - - 2,976 - 2,976 -
The carried interest payable ranks as a first distribution of capital gains on the investments held in HGT LP and is
deducted prior to such gains being paid to the Company in its capacity as a Limited Partner. The gross amount of
capital gains of HGT during the period is shown in the Income Statement.
5. Operating expenses 2005 2004
£'000 £'000
Custodian and administration fees 137 126
Directors' remuneration 98 112
Auditors' remuneration - audit services 24 23
- non-audit services 15 14
Other administration costs 224 209
498 484
The Company's total expense ratio ('TER') calculated as a
percentage of average net assets and including expenses,
after relief for taxation, was: 1.43% 1.83%
6. Ordinary shares
31 December 2005 31 December 2004
The number of ordinary shares in issue at the end of the
period on which net asset value per share was calculated was:
25,186,755 25,186,755
Share price 583.5p 451.5p
7. Publication of non-statutory accounts
The financial information contained in this preliminary statement does not constitute statutory
accounts as defined in section 240 of the Companies Act 1985.
8. The figures set out above have been reported upon by the independent auditor. The comparative
figures are derived from the audited financial statements of HgCapital Trust plc for the year ended
31 December 2004, except where restated as disclosed, which have been filed with the Registrar of
Companies. The report of the independent auditor for the years ended 31 December 2004 and 2005
contain no qualification or statement under section 237(2) or (3) of the Companies Act 1985.
9. The full annual report and financial statements for the year ended 31 December 2005 will be filed
with the Registrar of Companies.
10. The Annual General Meeting of the Company will be held at the offices of HgCapital Trust plc, Third
Floor, Minerva House, 3-5 Montague Close, London SE1 9BB on Tuesday 25 April 2006 at 12.00 noon.
11. Copies of the annual report will be sent to members shortly and will be available from c/o The
Company Secretary, HgCapital Trust plc, 33 King William Street, London EC4R 9AS.
13 March 2006
Minerva House, 3-5 Montague Close,
London SE1 9BB
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