Half-year Report and Dividend Declaration

HgCapital Trust PLC

16 September 2024

 

HgCapital Trust plc

INTERIM RESULTS FOR THE PERIOD ENDED 30 JUNE 2024

STRONG TRADING IN THE UNDERLYING PORTFOLIO CONTINUES TO DRIVE GROWTH

London, 16 September 2024:  HgCapital Trust plc ('HgT'), today announces its interim results for the period ended 30 June 2024. 

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

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

This objective has been demonstrated with a 10-year share price total return of +20.0% p.a.

Highlights over the first half of 2024 include:

¡ Strong portfolio trading continued to be the main driver of performance, contributing to a total return NAV increase of 6.4%, closing the period at 527.9p NAV per share and net assets of £2.4 billion.

¡ Share price total return of +12.7% over the period, closing at 485.0p per share and a market capitalisation of £2.2 billion.

¡ Discount narrowed from 13% to 7%.

¡ Continued investment, with £310 million of new and further investments by HgT across the core investment clusters targeted by Hg; with a further estimated £183 million of transactions signed pending closing in H2 2024.

¡ £348 million of gross realisations, with full and partial realisations at an average uplift of 16% to carrying value; an estimated further £75 million of realisations signed and due to complete in H2 2024.

For the third year in a row, HgT topped a list of investment companies that would have made investors more than £1 million, if they had invested the full annual ISA allowance in the same trust each year, according to research from The Association of Investment Companies (AIC). Investing the full ISA allowance annually from 1999 to 2023, a total of £306,560, and reinvesting the dividends in HgT shares would have generated a tax-free amount of over £2.2 million by 31 January 2024.

Jim Strang, Chairman of HgT, commented:

"HgT delivered another solid performance over the first six months of the year, successfully navigating challenging private market conditions. The portfolio continued to experience strong underlying trading performance over the period with sales and EBITDA across the top 20 investments (78% of the portfolio) growing at 19% and 26% respectively. Investment activity in businesses continued at a pace both in the first half and post period in order to generate good future returns to shareholders. These positive fundamentals supported a near 13% increase in the share price over the period and a halving of the discount to 7%."

David Toms, Head of Research at Hg, commented:

"The resilience of the Hg portfolio continues to be demonstrated by valuations and profitability remaining stable. Hg's companies are typically characterised by visible and greater than 90%

recurring revenues, attractive margins of over 30%, and by the ability to grow EBITDA organically by 10 to 15% each year, with further growth coming from M&A activity. These characteristics

provide exceptional resilience when the cycle swings downward and form a stable platform for accelerating growth when market conditions recover."

SUMMARY performance

	31 August 2024	% YTD Total return	30 June 2024	31 December 2023	% H1 Total return
NAV per share	518.5p	+4.5%	527.9p	500.5p	+6.4%
Share price	515.0p	+19.7%	485.0p	434.5p	+12.7%
FTSE All-Share Index		+11.3%			+7.4%
		YTD 2024 Movement			H1 2024 Movement
Net Asset Value	£2.4bn	+£83m	£2.4bn	£2.3bn	+£126m

Source: Hg, Factset. All references to total return allow for all historic dividends being reinvested
Note: Hg undertakes full revaluations of the portfolio on a quarterly basis, the next process being 30 September 2024, therefore the movement in unrealised value of the portfolio to the end of August 2024 is attributable to FX only.

Performance overview

Net assets of £2.4 billion, with continued long-term outperformance of the FTSE All-Share.

-     NAV per share of 527.9p, a total annual return of +6.4% for the six months to 30 June 2024.

-     Share price total return of +12.7% over the period.

-     Proposed interim dividend of 2.0p per share (2023 interim dividend 2.0p per share).

Strong double-digit growth from the top 20 portfolio:

-     Revenue and EBITDA growth of 19% and 26% respectively across the top 20 investments (78% of the portfolio) over the last twelve months, EBITDA margin of 34%.

-     Valuation multiple (EV/EBITDA) of 25.9x and net debt to EBITDA ratio of 7.4x for the top 20 investments (78% of the portfolio).

Continued portfolio activity to drive future value:

-     Continued investment with £310 million invested over the period 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.

-     £348 million of gross realisations, including full and partial exits.

POST PERIOD TO 31 august 2024

§ Pro forma NAV per share of 518.5p.

-     The change from the 30 June 2024 NAV per share is attributable to FX movements only. The full portfolio will be revalued at the end of September 2024.

§ Pro forma Net assets of £2.4 billion.

§ Share price of 515.0p, performance of +19.7% since 31 December 2023.

Realisations and investments

§ Realisations yet to complete in H2 2024 estimated to return c.£827 million of proceeds to Hg clients, including c.£75 million to HgT.

§ Estimated £183 million invested by HgT, into four new investments.

Liquid resources and commitments

§ Having increased the revolving credit facility by £25 million earlier in the year, to £375 million, the facility was c.£65 million drawn in July to cover investment opportunities.  

§ Available liquid resources post-completion of all announced transactions and the full year dividend payable in October 2024, are £458 million (19% of 31 August pro-forma NAV).

§ Outstanding commitments of £707 million (30% of 31 August pro-forma NAV). We expect these to be drawn down over the next three to four years.

Outlook

Commentary from Hg:

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

§ Resilient trading performance underpinned by mission-critical nature of products and services provided by portfolio companies

§ Improving deal environment is supportive of increased investment activity

§ We continue to focus on consistency of realisations, with further liquidity events anticipated

§ We remain excited by the long-term investment opportunity, as businesses seek to automate workflow to improve productivity and manage rising labour costs

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

- Ends -

HgT's 2024 Interim Report, results presentation and an animated presentation from Hg to accompany the results are available to view at:  http://www.hgcapitaltrust.com/.

For further details:

	HgCapital Trust plc
	George Crowe Laura Dixon		[phone] [phone]
Brunswick
Azadeh Varzi		[phone]

About HgCapital Trust plc

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

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

Interim report and accounts

30 June 2024

HgCapital Trust plc (the "Company" or "HgT") announces its interim results for the 6 months ended 30 June 2024 and the publication of its Interim Report for the same period.

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

Financial and performance highlights

Performance over six months to 30 June 2024

The first six months of 2024 have seen continued positive performance from the underlying portfolio companies driven by strong growth in sales and profitability and further liquidity events over the period.

Jim Strang, Chairman, HgT

+12.7%

Share price (485.0p)

Six months ended 30 June 2023: +7.1%

£2.2bn

Market capitalisation

As at 31 December 2023: £2.0bn

+6.4%

NAV per share (527.9p)

Six months ended 30 June 2023: +4.6%

£2.4bn

Net assets

As at 31 December 2023: £2.3bn

2.0p

Interim dividend

As at 30 June 2023: 2.0p

1.6%

Total annualised ongoing charges

As at 30 June 2023: 1.6%

£310m

Cash invested on behalf of HgT

Six months ended 30 June 2023: £33m

£308m

Realisations to HgT

Six months ended 30 June 2023: £229m

£566m

Available liquid resources (23% of NAV)

As at 31 December 2023: £625m (27% of NAV)

£912m

Outstanding commitments (38% of NAV)

As at 31 December 2023: £1.2bn (53% of NAV)

Note: NAV per share and share price return on a total return basis assuming all historical dividends have been re-invested, which is an Alternative Performance Measure ('APM'). Please see the definitions of the APM's in the glossary pages 66 to 67 in the full Interim Report.

Top 20 investments (78% of portfolio value)

A snapshot as at 30 June 2024

The resilience of the Hg portfolio continues to be demonstrated by valuations and profitability remaining stable. Hg's companies are typically characterised by visible and greater than 90% recurring revenues, attractive margins of over 30%, and by the ability to grow EBITDA organically by 10 to 15% each year, with further growth coming from M&A activity. These characteristics provide exceptional resilience when the cycle swings downward and form a stable platform for accelerating growth when market conditions recover.

David Toms, Head of Research, Hg

25.9x

EV to EBITDA multiple

31 December 2023: 26.1x

7.4x

Net debt to EBITDA ratio

31 December 2023: 7.4x

£11.5bn

LTM revenues

30 June 2023: £10.0bn

£3.5bn

LTM EBITDA

30 June 2023: £3.0bn

+19%

LTM sales growth

30 June 2023: +29%

+26%

LTM EBITDA growth

30 June 2023: +30%

34%

EBITDA margin

30 June 2023: 30%

Past performance is not a reliable indicator of future results. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations and investors may not get back the amount they originally invested. Figures are based on the Top 20 investments as at the balance sheet date and therefore can change year on year.

Chairman's statement

HgT delivered another solid performance over the first six months of the year, successfully navigating challenging private market conditions. The portfolio continued to experience strong underlying trading performance over the period with sales and EBITDA across the top 20 investments (78% of the portfolio) growing at 19% and 26% respectively. Investment activity in businesses continued at a pace both in the first half and post-period in order to generate good future returns to shareholders. These positive fundamentals supported a near 13% increase in share price over the period and a halving of the discount to 7%.

Jim Strang
Chairman, HgT

The first half of 2024 has been one of continued good progress for HgT, maintaining the momentum reported in the Q1 results and the annual results for 2023. The deal markets for private equity transactions continue to gradually improve, aided by improving investor confidence and more accommodative conditions in credit markets. As I noted in the full-year results announcement, the kind of high-quality software assets that make up the majority of the HgT portfolio continue to be viewed as some of the most attractive areas to invest across private markets and to transact at significant multiples.

The portfolio, which numbered 50 businesses at 30 June, has continued to trade well over the last six months, reflecting the characteristics of the types of companies targeted for investment by the Manager ('Hg'). Hg continues to refine and enhance its in-house value creation capability, notably around the important topic of Artificial Intelligence, and in growing the strength of the investment team globally. Given the discipline and rigour of the investment approach and the health of both the portfolio and the HgT balance sheet, the Board maintains its positive outlook  going forward.

Highlights to 30 June 2024 included:

•  12.7% total share price return

•  6.4% NAV per share growth on a total return basis, with net assets of £2.4 billion

•  Discount narrowed from 13% to 7%

•  LTM revenue and EBITDA growth of 19% and 26% for the top 20 companies (78% of the portfolio)

•  Investments of £310 million and gross realisations of £348 million

•  £566 million of liquid resources available, including an undrawn banking facility of £375 million

•  £912 million of outstanding commitments across the Hg fund platform to be invested over the next three to four years

Performance

The NAV of HgT increased by 6.4% on a total return basis over the first half of 2024, reflecting the ongoing strength of the operating performance of the HgT portfolio. HgT's share price saw a total return of 32.8% over the last 12 months, with 12.7% over H1 2024. On a long-term basis, HgT has seen a CAGR on a total return basis of 16.6% p.a. over the past 20 years, outperforming the FTSE All Share index by 9.3% p.a. over the same period.

The total net assets of HgT at 30 June 2024 were £2.4 billion, an increase of c.£126 million over the reported figures at 31 December 2023. An analysis of NAV movements and movement within the underlying portfolio is set out on pages 29 and 30 of the full Interim report.

At the end of June 2024, the HgT portfolio consisted of 50 investments, all of which sit within the Hg sector focus and investment strategy, targeting mission-critical software and services businesses. These assets have continued to perform well in aggregate and in line with the portfolio growth seen in recent years. The top 20 underlying companies (78% of the portfolio) continued to deliver double-digit revenue growth over the last 12 months of 19% (June 2023: 29%) and EBITDA growth of 26% (June 2023: 30%), reflecting the defensive-growth nature of the businesses in which HgT is invested. The portfolio continues to generate strong top-line growth and solid profitability, with the top 20 companies reporting an average EBITDA margin of 34%. Currently, 95% of the portfolio by value is held above its original cost of acquisition, a testament to the asset selection and value creation skills of the Manager.

These businesses typically exhibit highly predictable forward cash flows and are appropriately financed, including significant covenant flexibility around their financial structures. The top 20 investments have seen a weighted average net debt to EBITDA ratio of 7.4x (December 2023: 7.4x), which is consistent with the highly recurring revenues of the businesses that make up the Hg portfolio and is typical for large, high quality software assets in general. Given the average valuation multiple for the top 20 portfolio companies is 25.9x EV-to-EBITDA (December 2023: 26.1x), this implies that debt accounts for less than 30% of the portfolio company capital structures. This allows a significant equity cushion within the portfolio reflecting the Manager's prudent approach to leveraging and consistent with similar peer companies in the market. Hg has a dedicated capital markets team which continually monitors and manages the capital structures of the underlying portfolio companies to ensure they are as robust and flexible as possible in terms of tenor, interest cost and time to maturity.

As I have noted in the past, HgT aims to achieve long-term growth in the net asset value per share and in the share price, rather than to deliver a specific dividend yield. As regards the current financial year, HgT will pay an interim dividend of 2.0 pence per share (2023: 2.0 pence per share), payable in October.

Dividend: see page 63 of the full Interim report.

Dividend re‑investment plan: page 63 of the full Interim report.

Realisation activity over the first half of 2024 and post-period saw HgT generate material cash proceeds from exits at prices in excess of the carrying value of investments. These sale proceeds will be reinvested into businesses which continue to align with the well proven Hg investment model. With a performing portfolio, an attractive deal pipeline and a well capitalised balance sheet, HgT remains well positioned for second half of the year.

Investments and realisations

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

Investment activity was robust over the first half of the year, with a total of £310 million of new and further capital deployed within the first six months of the year, including Visma, IRIS, GGW, CUBE, CINC and Induver. Follow-on investments to finance bolt-on M&A is an area which the Manager has highlighted as particularly attractive in the current environment and where the sector-leading businesses across the portfolio can further improve their market positions, product and service offering.

Further investments announced both in the period and post 30 June included AuditBoard, Focus Group, CTAIMA and e-coordina and more recently Ncontracts. On completion, these transactions will represent c.£183 million of further investment by HgT.

The Board expects to see further co-investment activity (free of management fees and carried interest), over the next twelve months. HgT currently has 7% of net assets in co-investment and aims to grow this to 10-15% of NAV over the next few years in line with stated policy. Increasing allocation to co-investments allows HgT to more fully utilise its available liquid resources, to improve returns and to reduce the overall fee load for shareholders.

As I have noted in previous reports, the Hg investment model is based around supporting portfolio companies to achieve their full potential and in creating larger, more valuable and attractive businesses. As a result of this work, these are much sought after businesses in the markets in which they operate. Consequently, despite the challenging market conditions, Hg was able to deliver a number of liquidity events over the last year, which included the full and partial exits of, IRIS, GGW, Argus and Visma. In total, realisations returned £308 million to HgT.

Post-period, HgT estimates proceeds of £75 million to be returned from the realisations of F24, TeamSystem and team.blue. Over the past 10 years, full and partial realisations in software and services, including all announced transactions at the point of this report have generated an average uplift of 35% to the latest carrying value at signing. Valuations remain an area of continued focus for the HgT Audit Valuation and Risk Committee ('AVRC'), with the long term record of continued exit above recent holding values providing comfort.

Realisation activity continues to set Hg apart as the industry continues to find generating liquidity events challenging, highlighting the fundamental strengths and attractiveness of the underlying portfolio to both trade and financial buyers. Hg believes its exit activity, with more than 40 liquidity events since the start of 2022 has been a clear differentiator, highlighting the fundamental strengths and attractiveness of the underlying portfolio to both trade and financial buyers.

Please refer to pages 35 to 38 of the full Interim Report for further information on portfolio transaction activity.

Capital Allocation

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

Investments

At the core of the capital allocation policy is the imperative to continue to drive compelling investment returns for shareholders. As you will be aware, HgT has delivered very strong shareholder returns to investors over a period of more than two decades, a fact recently highlighted by the AIC.

The Board seeks to maintain this long-term record by continuing to access the repeatable returns delivered by the Hg investment platform since inception. HgT's commitments to Hg funds ensure that HgT maintains exposure to Hg's deal flow, which is the single biggest driver of investment opportunities with the potential to generate long-term returns. As such, the first priority of the Board is to ensure that HgT is positioned to access these returns to the fullest extent possible, at acceptable levels of risk. This includes co-investment opportunities (free of management fees and carried interest), as previously mentioned, in what is anticipated to be an attractive investment environment.

Buybacks

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

Dividends

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

Debt facility

The final element of the capital allocation policy relates to the use of leverage. HgT uses a Revolving Credit Facility of £375 million at the end of June 2024, to support the implementation of the investment strategy.

Balance sheet

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

As one of the tools used to manage the balance sheet, HgT has a revolving credit facility to support the investment programme and to improve balance sheet efficiency. In 2024, HgT increased its facility to £375 million, being c.15% of NAV, consistent with the historical sizing of this facility. This will aid HgT's future cash flow management.

HgT continues to benefit from a unique opt out clause within its underlying investment agreements with Hg (please refer to business model on page 14 of the full Interim Report for further detail), which provides a useful risk management tool for the Board in managing and optimising the HgT balance sheet.

Impact and responsible investment

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

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

Responsible Investment: see page 25 of Hg's review in the full Interim Report.

The Hg Foundation: see page 26 of Hg's review in the full Interim Report.

Reporting and Transparency

As mentioned in the 2023 Annual Report, the Board continues to look at ways to increase the effectiveness of communications for shareholders. 

In the case of improving transparency, shareholders will know that we are now providing preliminary trading updates, which provide our shareholders with earlier guidance on the performance of HgT ahead of the full year and interim results, after approval by the HgT Audit Valuation and Risk Committee ('AVRC') and the HgT Board.

Over the past six months, you will have also seen a greater focus on improving our website, our reporting materials and our public engagement through enhanced social media activity. Additionally, the capital markets day in June saw record numbers of attendees and it was received very positively.  These initiatives seek to build good quality and open communication with our stakeholders.

As we have stated before, this continued development in communications has also seen HgT engage with third party marketing specialists to increase the scope and span of brand marketing activities for HgT in the UK and overseas, where regulations permit.

Board and governance

As I noted in March, Anne West retired from the Board at the AGM in May 2024, after ten years of service. On behalf of myself and my fellow Directors, and as previously stated, I would like to thank Anne for her important contribution to HgT throughout her time on the Board. Following Anne's departure, Erika Schraner has been appointed Senior Independent Director and Helena Coles has taken on the role of Chair of the Management Engagement Committee.

In late 2023 we commenced the process to find a new Non-Executive Director and an external search firm was engaged to support the Nomination Committee and the Board in delivering a successful outcome to this process, noting the skills and experience which would be most additive to HgT.

We were pleased to announce in May the appointment of John Billowits to the Board. John has over 25 years of operational experience and a wealth of investment expertise in the software sector, and brings valuable international perspective, through his past roles and current appointments on Boards of US, Canadian and European software companies. As past CFO and CEO, and as a Chartered Accountant, John has significant depth of financial knowledge and experience.

John is a highly regarded investor and operator in the software sector and brings a unique combination of skills and personal strengths that are highly complementary to HgT and we are delighted he has chosen to join the Board.

Nomination Committee report see page 104 of the 2023 Annual Report governance section

Prospects

Following on from the resilient performance over 2023, HgT has continued to see positive returns over the first half of 2024, including share price appreciation, with the underlying portfolio continuing to deliver strong growth. Investment activity has accelerated over the period, as conditions improved from 2023 and as the industry looked favourably on the kinds of high-quality assets that make up the HgT portfolio.

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

Jim Strang
Chairman
13 September 2024

Manager's update

As long-term technology investors, we've seen various technology waves over the past three decades, and one feature recurs every time. The world might overestimate the speed of change, but it also underestimates the scale of change.David Toms
Head of Research, Hg

The first half of 2024 saw the broad software industry continue to deliver a strong performance for earnings forecasts, with c.20% annualised increase in Next Twelve Months ('NTM') forecast Earnings Per Share ('EPS'). This remains an acceleration from the decade-average of 13% NTM EPS growth, and in our view reflects an ongoing focus on margins from most of the software industry. Our analysis shows slight softening of organic revenue growth of c.2% across the basket of public companies we track with a profile similar to those in which Hg typically invests, over the past two years. Margin expansion has more than counteracted this and continues to drive earnings growth well ahead of revenue growth.

The Hg portfolio maintained its long-term trend of outperformance against the broader industry. The top 20 investments saw EBITDA growth of 26% which resulted from a healthy combination of 19% revenue growth plus some modest margin expansion. Both revenue and earnings have been underpinned by a broadly equal mix of organic growth and M&A.

In recent periods we have commented that we did not expect 2023's multiple expansion to persist and this was indeed the case in the first half of 2024. Public market multiples were relatively stable in the period (although they have been somewhat more volatile post the period end). This multiple stability was another trend that repeated across the portfolio, thus our investment performance for the period is the result of earnings performance, the ultimate arbiter of long-term outcomes, as we have previously demonstrated.

Following the last two years of strong exit and liquidity activity, we have crystallised much of the positive performance of our more mature fund vintages, substantially de-risking these funds and providing further validation of the valuations at which we hold our portfolio companies. All Hg fund vintages from 2012 to 2018 rank in the top quartile for Distributed to Paid-In Capital ('DPI') when compared to peers. As a result, the first half of 2024 has seen our collective efforts tilt somewhat towards new investment activity, with three new investments in the period, and two more signed immediately after the period end . We believe that activity-levels are steadily accelerating both for Hg funds and more broadly in the market.

Looking to the remainder of 2024, we remain of the view that multiples are unlikely to expand. Recent weeks have seen increased volatility in public markets, particularly influenced by currency movements. Whilst these have a limited direct impact on the portfolio, we have a watchful eye on the general macroeconomic picture and will continue to manage the interplay of revenue growth and margins in order to best drive long-term value.

Trading remains relatively robust, although headwinds to growth have increased slightly over the past six months. In particular, lower inflation means that even if real growth rates are sustained, nominal (i.e. reported) growth sees a couple of percentage points of drag on nominal organic growth. However, we should contextualise this for the kind of businesses we own, because it might not align with how other, more generalist investors, describe the environment. The vast majority of our revenue arises from the existing customer base, which typically is enough to drive modest growth even absent any new business. Previous cycles have shown that B2B software follows a late cycle, with a very muted effect of economic slowdown as software purchase / upgrade decisions are modestly deferred or scaled back. For our portfolio, when life gets a bit tougher and new business slows, or inflation falls, the actual impact on organic growth is much more limited.

Lower inflation is benefiting the debt financing environment. We have taken advantage of this opportunity to reprice/refinance a significant proportion of our debt packages this year, leading to $140 million of annualised interest saving across the portfolio. We have no maturities for the next two years, and 80% of debt has over three years to run.

We continue to be alert to opportunities and challenges arising from GenAI. It was, once again, the key focus at Hg's annual Software Leadership Gathering in Lucerne in June. Our speaker list this year featured several senior figures from the transatlantic software industry and focussed on looking for opportunities resulting from GenAI.  The discussions we hosted re-inforced our belief that established software companies are so valuable because of their sector IP, accumulated experience, customer relationships, and data; all of which enable them to deliver the best possible customer propositions at the lowest cost when using modern tools. The GenAI opportunity will not displace much of what our portfolio companies do for their customers, instead it will create meaningful opportunities to do it better or more efficiently.

Live examples of GenAI success in the portfolio continue to increase - doing things more efficiently (one of Visma's businesses is now automating 90% of support queries) and doing them better. There are more than 250 GenAI automation efficiency projects underway within the portfolio today.  We're also seeing early revenue from AI-enabled products - for example, customers paying a clear premium for automated invoice capture. 

As long-term technology investors, we've seen various technology waves over the past three decades, and one feature recurs every time. The world might overestimate the speed of change, but it also underestimates the scale of change. Put another way, markets and products won't evolve much in one year, but they will in ten years. Our role is to invest deeply in our capabilities and understanding to support the kinds of workflow companies that Hg backs to leverage this next generation of automation into their customers.

We remain active in generating liquidity, with a cumulative 40 events since the start of 2022, including 7 in the first half of 2024.

Luke Finch
Head of Client Services, Hg

Activity levels 

Investment Committee activity continued its acceleration; the first half of 2024 saw almost twice as many meetings as in the comparator period in 2023. The run rate is at a level that historically has proven appropriate to deliver our long-term average goal of 10 to 12 investments a year. Given the period over which we track potential investments, rising IC activity takes time to convert to new closed deals, and we remain very sensitive to investment quality in a recovering market.  Nevertheless, we are encouraged by the volume of activity and are starting to see this flow through to investments.

We remain active in generating liquidity, with a cumulative 40 events since the start of 2022, including 7 in the first half of 2024. In our view, this shows the sustained robust level of investor demand for high quality software and services businesses. As noted above, cash returns remain the best evidence of the reliability of our valuations, and the quality of our businesses.

M&A within the existing portfolio is a strong source of value creation. Deal volumes have accelerated over the past three years, and remain at a high level - over 300 transactions a year. The valuations for such investments tend to be materially lower than those of the platform companies that are acquiring them, providing an attractive source of enhanced returns. Of similar importance are the operational opportunities that this M&A enables as the platform company is able to drive both revenue growth and cost synergies.

Overview of the underlying investments held through HgT's limited partnerships

Investments (in order of value)		Fund	Sector	Location	Year	Residual cost £000	Total valuation2 £000	Portfolio value %	Cum. Value %
1	Visma	S1/S2/S3/HGT	Tax & Accounting/ERP & Payroll	Scandinavia	2024	205,767	334,709	12.7	12.7
2	Access	S3/G8/HGT	ERP & Payroll	UK	2020	160,266	308,995	11.7	24.4
3	IFS	S3/HGT	ERP & Payroll	Scandinavia	2022	115,939	141,361	5.3	29.7
4	Howden	S2/HGT	Insurance	UK	2021	60,909	138,158	5.2	34.9
5	Litera	G8/G9	Legal & Regulatory Compliance	N.America	2019	28,919	133,178	5.0	39.9
6	Septeo	G9	Legal & Regulatory Compliance	France	2020	53,671	120,527	4.5	44.4
7	Ideagen	G10/G9/M3	Legal & Regulatory Compliance	UK	2022	66,448	94,433	3.5	47.9
8	team.blue	G10/G8	Tech Services	Benelux	2022	38,078	92,889	3.5	51.4
9	P&I	S1/HGT	ERP & Payroll	Germany	2020	41,307	88,942	3.3	54.7
10	IRIS	S3/HGT	Tax & Accounting/ERP & Payroll	UK	2024	75,381	83,163	3.1	57.8
11	insightsoftware	S2/HGT	Tax & Accounting	N.America	2021	53,056	82,056	3.1	60.9
12	FE fundinfo	M2/G9	Fintech	UK	2021	26,229	73,909	2.8	63.7
13	Sovos	S2/HGT	Tax & Accounting	N.America	2020	49,593	72,397	2.7	66.4
14	Trackunit	G9	Automation & Engineering	Scandinavia	2021	26,593	51,469	1.9	68.3
15	Caseware	G8	Tax & Accounting	N.America	2020	21,255	46,612	1.8	70.1
16	Benevity	S2/HGT	ERP & Payroll	N.America	2021	32,124	44,091	1.7	71.8
17	GGW	S3	Insurance	Germany	2024	43,767	43,694	1.6	73.4
18	Rhapsody	M2/M3/HGT	Healthcare IT	N.America	2022	20,814	43,531	1.6	75.0
19	Citation	G8	Tech Services	UK	2020	18,890	42,690	1.6	76.6
20	Azets	G7/HGT	Tax & Accounting	UK	2016	26,505	40,187	1.5	78.1
21	Waystone	S2	Legal & Regulatory Compliance	UK	2022	40,904	40,058	1.5	79.6
22	Norstella	G9/M2	Healthcare IT	N.America	2021	24,730	39,431	1.5	81.1
23	Gen II	G9	Fintech	N.America	2020	19,921	38,515	1.4	82.5
24	HHA	G9	Healthcare IT	N.America	2021	24,035	33,160	1.2	83.7
25	smartTrade	M2/HGT	Fintech	France	2020	18,862	30,980	1.2	84.9
26	Project CH	S2	Tax & Accounting	Germany	2021	18,337	30,407	1.1	86.0
27	Prophix	G9	Tax & Accounting	N.America	2021	12,458	29,573	1.1	87.1
28	DEXT	S1/HGT	Tax & Accounting	UK	2021	15,620	28,278	1.1	88.2
29	Lucanet	G9	Tax & Accounting	Germany	2022	15,649	27,817	1.0	89.2
30	TeamSystem	G8	Tax & Accounting/ERP & Payroll	Italy	2021	7,447	23,065	0.9	90.1
31	Intelerad	G8	Healthcare IT	N.America	2020	11,870	20,909	0.8	90.9
32	CINC	M4/HGT	Tax & Accounting	N.America	2024	19,235	20,495	0.8	91.7
33	Athletic Sport Sponsoring	G8	Automation & Engineering	Germany	2017	15,343	18,732	0.7	92.4
34	F24	M2/HGT	Tech Services	Germany	2020	11,291	17,814	0.7	93.1
35	Pirum	M3/HGT	Fintech	UK	2022	13,928	17,654	0.7	93.8
36	Geomatikk	M2/HGT	Tech Services	Scandinavia	2021	11,392	17,602	0.7	94.5
37	GTreasury	M4/HGT	Tax & Accounting	N.America	2023	15,008	16,922	0.6	95.1
38	Auvesy	M3	Automation & Engineering	Germany	2021	8,130	16,526	0.6	95.7
39	Nitrogen	M3/HGT	Fintech	N.America	2021	15,868	13,941	0.5	96.2
40	Fonds Finanz	M3	Insurance	Germany	2022	8,309	13,843	0.5	96.7
41	Mitratech	G7/HGT	Legal & Regulatory Compliance	N.America	2017	3,328	13,685	0.5	97.2
42	Bright	M3	ERP & Payroll	Ireland	2021	6,529	11,696	0.4	97.6
43	Quantios	M3	Fintech	UK	2022	8,970	10,929	0.4	98.0
44	Revalize	G9	ERP & Payroll	N.America	2021	18,839	10,916	0.4	98.4
45	Serrala	G9	Tax & Accounting	Germany	2021	23,086	10,771	0.4	98.8
46	CUBE	M4	Legal & Regulatory Compliance	UK	2024	10,031	10,312	0.4	99.2
47	Blinqx	M3	ERP & Payroll	Benelux	2022	6,729	9,623	0.4	99.6
48	Nomadia	M3	ERP & Payroll	France	2023	6,935	8,426	0.3	99.9
49	JTL	M4	ERP & Payroll	Germany	2023	7,559	8,254	0.3	100.2
50	Induver	M4	Insurance	Benelux	2024	6,571	6,924	0.3	100.5
	Total buyout investments (50)					1,592,425	2,674,249	100.5	100.5
	Other		Hedges			8,982	(12,581)	(0.5)	(0.5)
	Total all investments					1,601,407	2,661,668	100.0	100.0

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

² Including accrued income of £108.1 million, but before a deduction for the provision for carried interest of £200.2 million and fund level facilities of £348.7 million. Note that the investments held at fair within the Balance Sheet on page 50 exclude accrued income but include the deduction for carried interest and the fund level facilities.

Dividend

The interim dividend proposed in respect of the year ending 31 December 2024 is 2.0 pence per share.

Ex-dividend date (date from which shares are transferred without dividend)	26 September 2024
Record date (last date for registering transfers to receive the dividend)	27 September 2024
Last date for registering DRIP instructions	11 October 2024
Dividend payment date	25 October 2024

Further Information

HgT's Interim Report for the six months ended 30 June 2024 will be available today on www.hgcapitaltrust.com

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

ENDS

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

 

END