Final Results
HG Capital Trust PLC
13 March 2007
HgCapital Trust plc
Preliminary Results for the year ended 31 December 2006
OVERVIEW
London, 13 March 2007: HgCapital Trust plc (or 'the Trust'), the Private Equity
Investment Trust managed by HgCapital, the European sector-focused private
equity investor, today announces preliminary results for the 12 months ended 31
December 2006.
Financial highlights
* Total return to shareholders (NAV plus dividend) increase of +21%.
* One year total return share price performance of +27% against FTSE All Share
of +17%.
* NAV increased by 20% to £187 million (2005: £156 million).
* Share price growth (total return) over ten-year period of +18% per annum
against +8% per annum in the FTSE All-Share Index for the same period.
* An investment of £1,000 ten years ago would now be worth £5,390 based on the
Company's share price at 31 December 2006, with dividends reinvested, compared
with £2,140 for the FTSE All-Share Index.
* Dividend of 14p per share (2005: 10p per share).
* The NAV has increased to £188 million (746.8p per share) at 28th February
2007; in addition, a further uplift in NAV of £4.4 million (17.5p per share)
is anticipated on completion of the sale of Hirschmann, which is subject to
cartel clearance.
Operational Highlights
* Invested £45 million, a new record, in 5 new and follow-on investments (2005:
£35 million), including the Trust's two largest ever investments in Visma (
Norway, £382 million EV) and Paragon (UK, £322 million EV).
* Another record year of realisations with proceeds of £62.3 million (2005: £52
million).
* The Trust made a €21 million commitment to the €300 million Hg Renewable Power
Partners fund, as HgCapital consolidated its position as the leading renewable
energy Private Equity investor.
* The Trust won the private equity investment trust of the year for the second
consecutive year at the Investment Week Awards, again demonstrating the
consistent strong performance of the company.
* The Trust realised £28.2 million from the sale of Castlebeck, a return of 8.6x
its initial investment, in a deal recognised by the industry as the UK &
Ireland Deal of the Year at the 2006 EVCA awards.
Roger Mountford, the Chairman, commented:
'HgCapital Trust continues to reward its investors with outstanding and
consistent returns. The Trust delivered a total return to shareholders (in terms
of NAV plus dividend) of 21%, while the total return (share price growth plus
dividend) was 27%. This performance compares with a total return by the FTSE
All-Share Index of 17%. The Company's Manager, HgCapital, has a long track
record of successful investment in mid-market buy-outs. The Board believes that
this continues to be a fruitful area for HgCapital Trust plc and its investors,
who want exposure to an asset class that still offers attractive long-term
prospects for growth.'
For further details:
HgCapital
Ian Armitage +44 (0)20 7089 7888
Maitland
Suzanne Bartch/Peter Ogden +44 (0)20 7379 5151
About HgCapital
HgCapital makes private equity investments in the European mid-market. We focus
on buyout investments in businesses with enterprise values ranging between EUR
50 and EUR 500 million. Our business model combines sector specialization with
dedicated, pro-active support to our portfolio companies and the application of
significant human resource to each phase of the investment process. We manage
more than EUR 2.7 billion for some of the world's most respected institutional
and private investors. We exist to generate superior outcomes for our clients,
management teams, vendors and intermediaries.
For more information on HgCapital please visit www.hgcapital.com.
RESULTS
Chairman's Statement
I am pleased to report that over the year to 31 December 2006 the Company's
total return to shareholders (in terms of net asset value plus dividend) was
21%, while the total return (share price growth plus dividend) was 27%. This
performance compares with a total return by the FTSE All-Share Index of 17%.
The Company received £62.3 million from the realisation of investments and
reinvested a total of £45.3 million in new and follow-on investments - both new
records. The Company's net asset value (NAV) per ordinary share grew by 20%,
from 621.3p to 743.0p. The share price of HgCapital Trust rose from 583.5p to
731.0p.
At year-end the market capitalisation of the Company had risen to £184 million.
Liquidity in the Company's shares has continued to improve with the result that
the Company is now well-established as a constituent of the FTSE All-Share
Index.
The Board is recommending a final dividend for the year of 14.0p per share
(2005: 10.0p), out of earnings per share of 17.9p (2005: 11.8p).
Investment strategy
The Company's Manager, HgCapital, has a long track record of successful
investment in mid-market buy-outs, which it defines currently as transactions
with an enterprise value between £50 million and £350 million. The Board
believes that this continues to be a fruitful area for investment, which, whilst
remaining competitive, is largely unaffected by the very large buy-out funds
that have recently been raised and which, by necessity, must focus on very large
deals.
While our Manager's origins lie in the UK market, it has carefully and
progressively grown its footprint in Continental Europe. HgCapital is now
well-established in the German market, where some other UK private equity firms
have found it difficult to make progress; some 31% of the Company's portfolio by
value was in Germany at year-end. During 2005 HgCapital established a team to
source opportunities in the Benelux market and opened an office in Amsterdam.
HgCapital also made its first investment in the Nordic region, through a public
offer for Visma. By year-end more than half the Company's portfolio by value was
based outside the UK, compared with a third a year earlier.
The Board believes that this trend will help the Manager to source a regular
flow of increasingly varied buy-out opportunities, in spite of increasing
competition in the private equity market.
In 2004 the Manager formed a team to focus on opportunities in renewable power
across Europe. The Board agreed to participate with other major clients of
HgCapital in investments in this area, in the knowledge that, if the concept was
proven, the Manager was likely to raise a fund which the Board could then
consider for the Company. A formula was agreed with the Manager to determine the
price at which the Company's investments could be transferred into the fund, if
the Board decided to do so. Since then it has become generally recognised that
renewable energy has a large and enduring potential market and during 2006
HgCapital successfully raised the largest fund of its kind in Europe. The Board
considered carefully the potential for this fund and decided that it would be in
shareholders' interests to consolidate all the Company's assets in this area by
committing €21 million to the fund and transferring existing investments into it
at the formula price.
2006 was another very good year for realisations. The Board believes it is
instructive for it, as well as the Manager, to understand clearly how value has
been created and we regularly invite the Manager to take the Board through its
analysis of value creation within portfolio companies. It is pleasing to note
that the major source of value creation is growth in the underlying
profitability and rating of our investments, rather than financial engineering
or arbitrage. This analysis informs the Board's judgment as to the degree, and
nature, of risk within the portfolio.
The Manager's strong historic performance and the base which it has for further
progress were recognised when the Company was, for the second consecutive year,
chosen as Private Equity Investment Trust of the Year in the Investment Week
Awards. We congratulate the Manager and its entire staff for their hard and
dedicated work in maintaining the Company's excellent performance.
Recognition of the Company's success helps to build liquidity in the Company's
shares, which in turn can help to avoid the shares trading at a discount to
their net asset value. The Board believes it is in shareholders' interests to
encourage greater understanding of the private equity market and the potential
benefits to long-term investors of investing in private equity investment
trusts, such as HgCapital Trust. To this end the Board was pleased to support
the Manager's proposal to establish the Initiative for Private Equity Investment
Trusts (iPEIT) and has agreed to make a small contribution to its running costs,
financed by savings elsewhere. We are particularly pleased that other private
equity investment trusts have joined the initiative. Further information can be
found at www.ipeit.com.
Following an excellent series of realisations achieved between 2004 and 2006 the
Company ended the year with some £36.6 million in liquid resources, a slightly
higher percentage of net assets than the year before. We took this opportunity
to test the market for bank facilities and as a result, we have negotiated a new
£25 million borrowing facility with a different lender on more attractive terms
than before. The Company is well-placed to take advantage of the flow of new
investment opportunities, across a wider geography, that the Manager is bringing
forward. The Board remains conscious that to fulfil the Company's objective, it
and the Manager should endeavour to keep the Company fully invested in growth
opportunities. If circumstances arise when there appears to be surplus capital
and conditions for new investment are unfavourable, the Board will consider
returning capital to shareholders, usually through the market purchase of
shares. It is worth noting in this context that the carried interest, which
forms part of the arrangements between the Company and the Manager, reinforces
the alignment of interest between shareholders and managers. 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 favourable, the Board will retain cash
to make new investments.
Prospects
While a large quantity of new money is continuing to flow into the private
equity asset class, supported by liquid credit markets, much of this is being
targeted at transactions outside the strategy successfully adopted over many
years by HgCapital and the Company. At the same time, our Manager's strategy,
supported by its investment in people and offices to give coverage across
Continental Europe, is providing a broader pipeline of potential deals, and the
resources to bring them to completion efficiently and diligently.
The Board remains confident that, for many investors, an allocation to private
equity merits a place in their portfolio, especially where a long-term
commitment can be made. HgCapital Trust has rewarded its shareholders well for
more than a decade and the Board believes that it will continue to provide
investors with an efficient vehicle for gaining exposure to an asset class that
offers attractive long-term prospects for growth.
Roger Mountford
Chairman
12 March 2007
Performance record
+--------+------------+------------+--------+--------+------------+---------+---------+
|Year | Net assets| Net asset|Ordinary| Gross| Revenue| Earnings|Dividends|
|ended |attributable| value| share| revenue| available| per| per|
|31 | to ordinary|per ordinary| price| |for ordinary| ordinary| ordinary|
|December|shareholders| share| | |shareholders| share| share|
| | £'000| p| p| £'000| £'000| p| 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|
+--------+------------+------------+--------+--------+------------+---------+---------+
|2006 | 187,135| 743.0| 731.0| 7,769| 4,519| 17.9| 10.00*|
+--------+------------+------------+--------+--------+------------+---------+---------+
*Final dividend for the year ended 31 December 2005, declared on 13 March 2006,
paid on 2 May 2006.
Historical total return* performance
+---------------------+-----------+--------------+------------+------------+------------+
| | One year| Three years| Five years| Seven years| Ten years|
| | % p.a.| % p.a.| % p.a.| % p.a.| % p.a.|
+---------------------+-----------+--------------+------------+------------+------------+
|Share price | 27.2 | 39.3 | 23.2 | 17.4 | 18.3 |
+---------------------+-----------+--------------+------------+------------+------------+
|Net asset value | 21.4 | 25.8 | 16.3 | 13.7 | 14.5 |
+---------------------+-----------+--------------+------------+------------+------------+
|FTSE All-Share Index | 16.8 | 17.2 | 8.5 | 3.0 | 7.9 |
+---------------------+-----------+--------------+------------+------------+------------+
|FTSE Small Cap Index | 20.6 | 18.9 | 11.2 | 5.9 | 8.7 |
+---------------------+-----------+--------------+------------+------------+------------+
Based on the Company's share price at 31 December 2006 and allowing for
dividends to be reinvested, an investment of £1,000 ten years ago would now be
worth £5,390. By comparison £1,000 invested in the FTSE All-Share Index would be
worth £2,140.
* Total return assumes all dividends have been reinvested.
Investment Manager's Review
2006 was another record year for realisations and investments, with the current
portfolio continuing to perform well
The Company invests alongside other clients of HgCapital. Typically, the
Company's holding forms part of HgCapital's much larger controlling interest in
buy-out investments of companies with an enterprise value (EV) of between £50
million and £350 million. The Investment manager's review generally refers to
each transaction in its entirety, apart from the tables detailing the Company's
participation or where it specifically says otherwise.
The Company's net asset value increased from £156 million to £187 million during
the year. This arose from unrealised movements and realised proceeds in excess
of the book value of £14.4 million and £20.5 million respectively. This increase
is the result of strong earnings growth and cash generation within the
portfolio, as well as a good flow of realisations.
We saw strong earnings growth at Hirschmann, The Sanctuary Spa, Elite and Blue
Minerva. The Company's quoted investments have also performed well, with
Raymarine being realised during the period, strong share price growth in Xtx
(Xyratex) and the flotation of ClinPhone. We realised our investment in
Castlebeck and have agreed to sell Worldmark, both at values significantly above
their opening book values.
A minority of the Company's investments performed below expectations, in
particular Eagle Rock, Match and Classic Copyright. These investments have been
written down accordingly.
During the year, the Company invested a total of £45.3 million (2005: £35
million), participating in five new buy-out investments. These new investments
were made in Visma (Norway, £382 million EV), Paragon (UK, £322 million EV),
Surrey (t/a SHL) (UK, £100 million EV), FTSA (Canada, £53 million EV), and
Schleich (Germany, €165 million EV).
During the year, the Company also made a €21 million commitment to the €300
million Hg Renewable Power Partners fund. The fund's focus is on long-term
investments in renewable power projects using proven technologies, including
wind, small hydro, landfill gas, and waste-to energy in Western Europe.
The Company realised record proceeds during the year (including gross income
received), amounting to £62.3 million (2005: £52 million). These proceeds arose
principally from the sale of Castlebeck and Travelsphere and from the sale of
quoted shares in Raymarine, Xyratex and ClinPhone.
Since the period end, we have completed the sales of Worldmark, South Wharf,
Luxfer and Bertrams. In aggregate, these realisations have returned proceeds of
£6.5 million compared with a December 2006 carrying value of £5.7 million. In
addition we have agreed to sell the HAC division of Hirschmann, subject to
cartel clearance, which is expected towards the end of March. Upon completion,
this is estimated
to result in proceeds and value in the remaining division of £14.4 million for
the Company against the December 2006 book value of £10 million.
Attribution analysis of current year movements in net asset value
£'000
Opening net asset value as at 1 January 2006 156,487
Gross revenue 7,769
Expenditure (3,557)
Taxation (1,227)
Dividends paid (2,519)
Realised proceeds in excess of 31 December 2005
book value (excludes gross revenue)
20,512
Net unrealised appreciation of investments 14,407
Carried interest (4,737)
Closing net asset value as at 31 December 2006 187,135
Realised and unrealised movements in net asset value during 2006
Realised Unrealised
Proceeds* Appreciation**
Total
£'m £'m
£'m
Castlebeck 18.1 18.1
Hirschmann 6.0 6.0
The Sanctuary 5.2 5.2
Elite 3.4 3.4
Xtx 3.0 3.0
Blue Minerva 2.4 2.4
Worldmark 2.2 2.2
ClinPhone 1.3 1.0 2.3
Raymarine 0.9 0.9
Other 0.2 (1.5) (1.3)
Eagle Rock (0.9) (0.9)
March Holdings (1.9) (1.9)
Classic Copyright (4.5) (4.5)
Total 20.5 14.4 34.9
*Realised proceeds in excess of 31 December 2005 book value (excludes gross
revenue)
**Net unrealised appreciation of investments
Strong earnings growth from a diversified, sector-focused portfolio, with an
increasing exposure to Continental Europe
At the end of 2006 the Company held a portfolio of 42 Investments (2005: 44), of
which the twenty principal investments represented over 90% of the portfolio's
value.
This portfolio of small- and mid-cap stocks combines strong growth with sector
and geographic diversification.
Following this series of realisations and new investments, the portfolio at
year-end was relatively young. Around 55% of the portfolio by value had been
acquired within the previous two years, compared with 39% a year earlier. It is
the Company's policy not to revalue any investment upwards until receipt of
audited accounts for the trading period following acquisition: as a result, some
49% by value of the portfolio at year-end was still held at cost against 37% the
year before.
Over the last two years, the focus of the portfolio has shifted towards
Continental Europe, where we have seen an increasing number of attractive
investment opportunities. As at December 2006 over half the Company's
investments by value were located outside the UK compared with under 25% at the
end of 2004.
The top 20 investments in aggregate have historically grown both revenues and
profits in excess of 20% per annum. The portfolio's valuation increased over the
year to £148.5 million, benefiting from strong profit growth and positive cash
flow.
Another year of record new investment activity was accompanied by record
realisations. The Company ended the year with £36.5 million of liquid resources
or 20% of net assets. 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 the portfolio.
Asset class Geographic spread by value
Unquoted 72% UK 46%
Cash & other assets 20% Germany 31%
Quoted 8% Europe Other 10%
Benelux 7%
North America 5%
Ireland 1%
Valuation basis Deal type by value
Cost 49% Buy-out 90%
Earnings 28% Expansion 7%
Quoted 10% Renewable energy 1%
Written down 9% Fund 1%
Net assets 2% Venture 1%
Other 2%
Sector by value Vintage by value
TMT 40% 2006 30%
Industrials 29% 2005 25%
Consumer & Leisure 13% 2004 17%
Healthcare 11% 2003 13%
Services 5% 2002 2%
Renewable energy 1% 2001 2%
Fund 1% 2000 2%
Pre-2000 9%
Percentages shown are by value
Investments
During 2006 HgCapital invested a total of £304 million on behalf of its
clients, including £45.3 million on behalf of the Company.
Company Sector Activity Deal Type Cost
£'000
Visma TMT Accounting and
business software Buy-out 13,268
Paragon Healthcare Care homes Buy-out 10,746
Surrey (t/a SHL) Services Psychometric testing
and assessment Buy-out 7,534
FTSA Industrials Crash test dummies Buy-out 6,235
Schleich Consumer and
Leisure Plastic toy figurines Buy-out 4,634
Hg RPP LP Renewable energy Renewable energy fund Fund 350*
New investments 42,767
Schenck Industrials Industrial measuring
and weighing systems Buy-out 2,372
Other 127
Further investments 2,499
Total investment by the Company 45,266
* This reflects the net investment in the year following the sale of the
Company's renewable assets to the Hg RRP fund
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.
New investments
Visma
In May 2006, HgCapital completed the £382 million buy-out of Visma, the number
one provider of business software and related services to small and medium-sized
enterprises in the Nordic region. Headquartered in Oslo, with significant
revenues
in Sweden, Finland and Denmark, the company provides accounting, resource
planning and payroll software in addition to debt collection and procurement
services to its customer base of over 200,000 enterprises.
Paragon
In April 2006, HgCapital completed the £322 million buy-out of Paragon
Healthcare Group. Paragon owns and operates small community-based homes for
adults with learning disabilities and associated physical disabilities, autistic
spectrum disorders, complex needs and acquired brain injury. The company
currently operates 1,600 beds in 242 homes across England and Wales, making it
the largest operator in its field.
Surrey (t/a SHL)
In November 2006, HgCapital completed the £100 million public-to-private
acquisition of SHL Group plc. SHL provides world-leading psychometric testing
products for the workplace in over twenty countries. Psychometric testing is
increasingly accepted as a proven and fair way to recruit and retain talent in
an extremely competitive marketplace. SHL has produced consistent revenue growth
of 9% per annum for the last five years.
FTSA
In March 2006, HgCapital completed the £53 million buy-out of FTSA, the global
market leader in the design and manufacture of crash test dummies for use in the
automotive and aerospace industries. It also provides associated technical
support and laboratory services, and develops and supplies sophisticated
software for computer-simulated crash testing, as well as marketing bespoke
engineering services and products to the medical and aerospace industries. Its
sales are split evenly between North America, Europe and the Far East.
Schleich
The €165m buy-out of Schleich was completed in December 2006. Schleich is the
leading producer of plastic toy figurines such as farm and wildlife animals,
historical characters and The Smurfs. Its products are sold in over thirty
countries, including Germany, the US, the UK and France. Toy figurines are an
attractive product offering for retailers as they are purchased on different
buying occasions throughout the year, in contrast to traditional toy sales'
patterns, where typically 50% of sales are made in the two months leading up to
Christmas.
Hg Renewable Power Partners fund (Hg RPP)
The Company made a commitment of €21 million to the Hg RPP fund.
Follow-on investments
Schenck
In June 2006, Schenck completed the acquisition of Stock Equipment Company (USA)
Inc, the world market leader for bulk handling and feeding systems for
coal-fired power plants. This gives Schenck exposure to one of the key growth
industries not previously covered.
Realisations
During 2006 HgCapital realised total proceeds of £323 million on behalf of
its clients, including £62.3million on behalf of the Company.
Company Sector Exit route Cost Proceeds+ 2006
return+
£'000 £'000 £'000
Castlebeck Healthcare Trade sale 861 28,177 27,316
Travelsphere Consumer and
leisure Financial 3,899 7,932 4,033
Raymarine * Consumer &
Leisure Quoted share 61 4,384 4,323
sale
PBR Healthcare Trade sale 3,495 2,532 (963)
Other*** Liquidation 6,038 211 (5,827)
Full realisations 14,354 43,236 28,882
Xtx (t/a Xyratex)** TMT Quoted share 3,823 7,622 3,799
sale
ClinPhone * Healthcare IPO 1,079 5,623 4,544
The Sanctuary Spa Consumer &
Leisure Recapitalisation 1,948 3,865 1,917
Other 1,877 1,995 118
Partial 8,727 19,105 10,378
realisations
Total realisations
by the Company
23,081 62,341 39,260
+ Includes gross revenue received during the year.
* Listed on the London Stock Exchange.
** Traded on NASDAQ.
*** Includes entities liquidated during the year that had previously been
written down.
Figures below refer to the total value of each realisation, including, where
appropriate, repayment of third party debt. Proceeds to clients including the
Company are stated net of any such repayment.
Full realisations
Castlebeck
Castlebeck is one of the UK's largest providers of residential healthcare to
adults and adolescents with learning difficulties or severely challenging
behaviour. In July 2006 we sold this investment to Castle Holdings Limited for
£255 million. Castlebeck has returned 8.6 times the original investment cost in
a deal recognised by the industry as the UK and Ireland Deal of the Year at the
2006 EVCA awards.
Raymarine
Raymarine is the leading global manufacturer of recreational marine electronic
products. The business was listed on the stock market in December 2004 and we
sold our remaining shares in the company in March 2006. This investment has
returned 4.4 times the original investment cost.
Travelsphere
Travelsphere is a leading provider of escorted coach tour holidays from the UK
to around seventy countries worldwide, focusing on the 45+ age group. We sold
the business to Electra Partners for £155 million in April 2006. This investment
has returned 2.5 times the original investment cost.
PBR
PBR is a market leader in the management of complex Phase I and Phase IIA
clinical trials of new drugs on behalf of the world's top pharmaceutical and
biotechnology firms. We sold the business to PRA in July 2006 for €85 million.
However, our investment was not fully divested: HgCapital clients retain a stake
in PRA International, who acquired the business and paid partly in cash, partly
in equity.
Partial realisations
Xtx (Xyratex)
In 2006 we took the opportunity to realise 36% of HgCapital clients' holding in
Xyratex, the NASDAQ-quoted data storage and network technology business. This
investment has returned 2.4 times the original cost (including the unrealised
value).
ClinPhone
In June 2006, we completed the flotation of ClinPhone on the London Stock
Exchange. ClinPhone is a leading supplier of technology solutions to the
clinical trials industry. HgCapital clients have retained a 6.2% stake. This
investment has returned 3.5 times the original cost (including the unrealised
value).
The Sanctuary Spa
The Sanctuary Spa operates the UK's leading women-only day spa and also retails
beauty products under its brand. During the period the business has been
recapitalised, enabling cash to be returned to investors.
Investment portfolio
Company Sector Location Residual Valuation Year of Portfolio Cum.
cost investment value Value
£'000 £'000 % %
1 VISMA + TMT Europe
Other 13,268 12,251 2006 8.2% 8.2%
2 Schenck + Industrials Germany 11,698 11,537 2005 7.8% 16.0%
3 Paragon + Healthcare UK 10,746 10,746 2006 7.2% 23.2%
4 Hirschmann
Electronics +
Industrials Germany 2,669 10,078 2004 6.8% 30.0%
5 Xtx (t/a
Xyratex) ** TMT UK 3,172 9,717 2003 6.5% 36.5%
6 Elite + TMT Benelux 5,749 9,502 2005 6.5% 43.0%
7 Blue Minerva
(t/a IRIS) + TMT UK 2,957 7,613 2004 5.1% 48.1%
8 Surrey 1
(t/a SHL) + Services UK 7,534 7,534 2006 5.1% 53.2%
9 W.E.T + Industrials Germany 7,590 6,625 2003 4.5% 57.7%
10 Addison + TMT Germany 6,499 6,509 2005 4.5% 62.2%
11 Sanctuary Spa Consumer &
+ Leisure UK 631 6,082 1995 4.1% 66.3%
12 FTSA + North
Industrials America 6,235 6,008 2006 4.0% 70.3%
13 Clarion
Events +
TMT UK 4,965 5,704 2004 3.8% 74.1%
14 Sporting Consumer &
Index + Leisure UK 5,428 5,428 2005 3.7% 77.8%
15 Hofmann + Industrials Germany 4,747 4,673 2005 3.1% 80.9%
16 Schleich + Consumer &
Leisure Germany 4,634 4,640 2006 3.1% 84.0%
17 Worldmark
International Industrials UK 2,389 3,214 2000 2.2% 86.2%
18 Rolfe & Nolan TMT UK 238 2,366 1996 1.6% 87.8%
+
19 ClinPhone * Healthcare UK 7 2,027 2003 1.4% 89.2%
20 Hoseasons + Consumer & UK 2,197 1,929 2004 1.3% 90.5%
Leisure
21 Doc M Healthcare Germany 1,956 1,857 2004 1.3% 91.8%
22 Axiom TMT UK 1,805 1,805 2001 1.2% 93.0%
23 Hg RPP + Renewable Europe 1,725 1,553 2006 1.0% 94.0%
energy Other
24 PRA *** Healthcare Benelux 1,478 1,504 2002 1.0% 95.0%
25 Classic TMT UK 6,033 1,486 2003 1.0% 96.0%
Copyright +
26 Bertram + Consumer & UK 2,848 1,482 1999 1.0% 97.0%
Leisure
27 Weston Fund North 1,867 1,201 1998 0.8% 97.8%
Presidio America
Capital III
28 South Wharf ^ Industrials Ireland 47 992 1992 0.7% 98.5%
29 Eagle Rock + TMT UK 3,856 916 2001 0.6% 99.1%
30 Orbiscom TMT Ireland 3,063 599 2001 0.4% 99.5%
31 Euroknights Fund Europe 1,455 408 1996 0.3% 99.8%
Other
32 Match Healthcare UK 3,854 335 1999 0.2% 100.0%
33 PARC Services Ireland 42 166 1995 0.0% 100.0%
34 ACT Fund Ireland - 40 1994 0.0% 100.0%
35 Orbis * Services UK 3,378 15 1997 0.0% 100.0%
36 Burns TMT UK 3,244 - 2001 0.0% 100.0%
37 SGI + Services UK 1,972 - 1999 0.0% 100.0%
38 Profiad + Healthcare UK 1,653 - 1999 0.0% 100.0%
39 Newchurch Healthcare UK 1,296 - 2000 0.0% 100.0%
40 Azinger Services Ireland 204 - 1993 0.0% 100.0%
41 Luxfer + Industrials UK 46 - 1996 0.0% 100.0%
42 Weston Fund North - - 1995 0.0% 100.0%
Presidio America
Capital II
Total 145,175 148,542 100.0%
* Listed on the London Stock Exchange
^ Listed on the Dublin and London Stock Exchange
** Traded on NASDAQ
*** Traded on NASDAQ. The shares are subject to dealing restrictions that expire
in July 2007
+ HgCapital controls more than 50% of the voting equity shares through its
management of the Company and other funds
Investing in private equity
Strong performance in absolute terms and relative to other asset classes
Private equity
Private equity describes securities issued by private and unlisted companies.
The securities are equity and equity-related, enjoying the full rewards and
risks of ownership. Investments can be in early-stage businesses, or provide
expansion capital for profitable growing businesses, and can be used to finance
management or leveraged buy-outs of established businesses. The objective is to
achieve higher returns than public equity over a rolling period of five to ten
years. Investments are typically held for three to seven years and are realised
through an initial public offering, a trade sale, or a sale to another financial
institution. Interim proceeds are sometimes possible through recapitalisations.
Investment profile
Private equity investments are less liquid than public equities. To compensate
for this feature they offer more control and more attractive returns. Over the
ten years from 1995 to 2005 UK private equity funds outperformed the FTSE
All-Share Index by over 8% per annum 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 to mitigate some of these risks;
more important mitigants are the quality of company selections by the private
equity manager and the quality of the management teams running the company.
* Source: BVCA Performance Measurement Survey 2005.
Advantages of private equity
Compared with investment in the public markets, a private equity investor has
significant advantages:
* More investment opportunities: significantly more private than listed
companies
* Better access to information: the ability to conduct detailed market,
financial, legal and management due diligence
* More control for the private equity manager over the management of the
business and the timing of its sale
* Alignment of interest of owners and management, leading to better decision
making: the opportunity to act like an owner rather than a fund manager, with
the benefit of representation on the Board
* Management talent: the ability to attract high calibre management and the
alignment of management's interests to the success of the investment through
equity participation
Private Equity Investment Trusts (PEITs)
A Private Equity Investment Trust (PEIT) offers the opportunity to participate
in a diversified portfolio of mainly unquoted companies that are generally
valued at a discount to their quoted peers. By buying shares in a PEIT, which
are freely traded, the investor benefits from liquidity while participating in
the potentially 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 a dividend each year.
The earnings of a PEIT in any year are affected by various factors, including
the structure of the underlying investments. Accordingly the revenue earnings
per share and the dividend of a PEIT will tend to fluctuate from year to year. A
PEIT should not be confused with a Venture Capital Trust (VCT) which offers tax
advantages to certain investors but is highly constrained in the companies that
qualify for investment. Advantages of investment via an investment trust PEITs
offer investors liquidity in their shares, which can be traded in variable
bargain sizes and at any time. This is of significant benefit to investors who
do not wish to commit to the ten year lock-in and participation required when
investing in private equity via limited partnerships.
Share price
The major driver of a PEIT share price is net asset value (NAV), the growth of
which is driven by realisations and by revaluation of the unrealised portfolio,
based on the profitability of each underlying investment and market ratings. The
share price of a PEIT usually tracks NAV but it may trade at a premium or
discount, depending on the market's view of future realisations and new
investments, and the investment strategy of the manager. Although not all PEITs
will provide high returns, a strong manager with a carefully thought-out
investment strategy that offers a diversified portfolio of companies across a
number of sectors and geographies can increase the likelihood of success.
Publication of net asset value
Unquoted investments are revalued twice each year, in December and June, and the
NAV is adjusted to reflect these valuations in the following March and September
respectively. The NAV per share of the Company is calculated monthly with
respect to cash, cash equivalents and listed investments in the portfolio, and
to reflect any realisations since the previous valuation. The NAV is released to
the public through the London Stock Exchange's regulatory news service on the
fourth day of each month. This NAV is then used as the basis for calculation of
the discount or premium published in newspapers for the following month.
Investment manager's strategy
To maximise returns from mid-market private equity through sector
specialisation, with the deep resources required to support pro-active work with
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
Whilst investments across all of Western Europe are considered, we focus
primarily 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, optimises 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 within its target size
range and across the relevant 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 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 records and/or predictable
cash flows
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 investor. Our sector
teams (Consumer and Leisure, Healthcare, Industrials, Services and TMT) 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.
In addition, over the last three years we have built a specialist team to
identify businesses that will operate, construct and develop renewable energy
projects in Western Europe.
Active portfolio management
We undertake intensive, continuous, informed interaction with our portfolio
companies using 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 management. We appoint HgCapital executives
to our companies' boards to participate in business planning and to 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.
Particular attention is given to those that are recent, underperforming or
scheduled for exit.
Deep resources
We invest substantially in all areas of our business to ensure that high quality
resources can be applied to each aspect of an investment opportunity. Our team
of over seventy 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 2006
Revenue return Capital return Total return
Note 2006 2005 2006 2005 2006 2005
£'000 £'000 £'000 £'000 £'000 £'000
Gains on - - 34,919 37,706 34,919 37,706
investments and
government
securities
Carried interest - - (4,737) (2,976) (4,737) (2,976)
Income 2 7,769 4,963 - - 7,769 4,963
Investment 3 (730) (587) (2,191) (1,761) (2,921) (2,348)
management fee
Other expenses 4 (636) (498) - - (636) (498)
Return on ordinary 6,403 3,878 27,991 32,969 34,394 36,847
activities before
taxation
Taxation on (1,884) (913) 657 528 (1,227) (385)
ordinary activities
Transfer to 4,519 2,965 28,648 33,497 33,167 36,462
reserves
Return per ordinary 17.94p 11.77p 113.74p 132.99p 131.68p 144.76p
share
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.
BALANCE SHEET
as at 31 December 2006
2006 2005
£'000 £'000
Fixed assets
Investments held at fair value
- Quoted at market valuation 14,255 18,736
- Unquoted at Directors' valuation 134,287 109,504
148,542 128,240
Current assets
Debtors 10,005 6,609
Government securities 34,284 24,515
Cash 2,268 867
46,557 31,991
Creditors - amounts falling due within one (7,964) (3,744)
year
Net current assets 38,593 28,247
Net assets 187,135 156,487
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 152,787 122,191
Capital reserve - unrealised 2,985 4,933
Revenue reserve 9,696 7,696
Total equity shareholders' funds 187,135 156,487
Net asset value per ordinary share 743.0p 621.3p
CASH FLOW STATEMENT
for the year ended 31 December 2006
2006 2005
£'000 £'000
Net cash (outflow)/inflow from operating activities (2,273) 1,542
Taxation recovered 2,666 352
Capital expenditure and financial investment
Purchase of fixed asset investments (45,266) (35,376)
Proceeds from the sale of fixed asset investments 59,805 48,831
Net cash inflow from capital expenditure and
financial investment 13,455
14,539
Equity dividends paid (2,519) (2,015)
Net cash inflow before management of liquid 12,413 13,334
resources
Management of liquid resources
Purchase of government securities (111,342) (50,890)
Sale/redemption of government securities 100,334 37,246
Net cash outflow from management of liquid resources (11,008) (13,644)
Increase/(decrease) in cash in the period 1,405 (310)
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
for the year ended 31 December 2006
Called up Share Capital Capital Revenue Total
Share premium redemption reserves reserves
capital account reserve
£'000
£'000 £'000 £'000 £'000 £'000
At 31 December 2005 6,296 14,123 1,248 127,124 7,696 156,487
Net return from
ordinary activities
after tax - - - 28,648 4,519 33,167
Dividends paid - - - - (2,519) (2,519)
At 31 December 2006 6,296 14,123 1,248 155,772 9,696 187,135
At 31 December 2004 6,296 14,123 1,248 93,627 6,746 122,040
Net return from
ordinary activities
after tax - - - 33,497 2,965 36,462
Dividends paid - - - - (2,015) (2,015)
At 31 December 2005 6,296 14,123 1,248 127,124 7,696 156,487
Notes to the financial statements
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 and section 842 of the
Income and Corporations Taxes Act 1988.
Basis of preparation
The accounts have been prepared in accordance with applicable Accounting
Standards and with the Statement of Recommended Practice 'Financial Statements
of Investment Trust Companies' (SORP), dated January 2003 and revised in
December 2005. All of the Company's operations are of a continuing nature.
Associated undertakings
Certain venture capital investments deemed to be associated undertakings are
carried at fair value in accordance with the Company's Investments accounting
policy and Financial Reporting Standard (FRS) 9.
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 dividends, the equivalent of the cash
dividend is recognised as 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 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
the board's expected split of 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, are charged wholly to the revenue
account. Expenses that are incidental to the purchase or sale of an investment
are included within the cost or deducted from the proceeds of the investment.
Foreign currency
All transactions in foreign currencies are translated into sterling at the rates
of exchange ruling at the dates of such transactions. Foreign currency assets
and liabilities at the balance sheet date are translated into sterling at the
exchange rates ruling at that date. Exchange differences arising on the
translation of foreign currency assets and liabilities are taken to Capital
reserve - realised.
Taxation
Deferred taxation is recognised in respect of all timing differences that have
originated but not reversed at the balance sheet date where transactions or
events that result in an obligation to pay more tax in the future, or the right
to pay less, have occurred at the balance sheet date. This is subject to
deferred assets only being recognised if it is considered more likely than not
that there will be suitable profits from which the future reversal of the
underlying timing differences can be deducted. Timing differences are
differences between the Company's taxable profits and its results, as stated in
the financial statements, which are capable of reversal in one or more suitable
periods.
Investments
The general principle applied is that investments should be reported at 'fair
value' in accordance with FRS26 and the International Private Equity and Venture
Capital Association (IPEVCA) valuation guidelines issued jointly by the British
Venture Capital Association (BVCA) and the European Venture Capital Association
(EVCA) in February 2005.
Quoted: Quoted investments are designated as held at fair value, which is deemed
to be bid market prices.
Unquoted: Unquoted investments are also designated as held at fair value and are
valued using the following criteria:
(i) Initially, investments are fair 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 with reference to
their net assets rather than earnings.
(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.
Capital reserves
Capital reserve - realised
The following are accounted for in this reserve:
(i) gains and losses on the realisation of investments
(ii) losses on investments within the portfolio where there is little
prospect of realisation or recovering any value;
(iii) realised exchange differences of a capital nature; and
(iv) 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; and
(ii) unrealised exchange differences of a capital nature.
Organisational structure
In May 2003, the Company entered into a partnership agreement with HGT General
Partner Limited and MUST 4 Carry LP. A limited partnership, HGT LP, was
constituted to carry on the business of an investor with the Company being the
sole limited partner in this entity.
Under the partnership agreement, the Company made a capital commitment of its
non-cash investment portfolio to HGT LP with the result that all fixed asset
investments are now held through HGT LP. The Investment portfolio on page 14 of
this report presents the underlying investments held in HGT LP. The income and
capital accruals relating to the investments held in HGT LP are shown the
Balance Sheet. Carried interest paid to the Founder Partner is shown on the face
of the Income Statement as it is the first charge on investment gains.
The agreement stipulates that the associated income and capital profits, after
payment of the carried interest and the General Partner share, are distributed
to the Company and consequently these amounts (including the associated cash
flows) are shown in the appropriate lines within the Income Statement, Cash Flow
Statement and the related notes.
2. Income
2006 2005
£'000 £'000
Income from investments
UK unquoted investment income 5,370 2,251
UK dividends 82 833
Overseas dividends - 18
5,452 3,102
Gilt interest 2,056 1,692
Deposit interest 95 146
Other income 166 -
Underwriting commission - 23
2,317 1,861
Total income 7,769 4,963
Total income comprises:
Dividends 82 851
Interest 7,687 4,089
Underwriting commission - 23
7,769 4,963
3. Investment management fee
Revenue Capital Total
return return return
2006 2005 2006 2005 2006 2005
£'000 £'000 £'000 £'000 £'000 £'000
Investment
management
fee 621 500 1,865 1,499 2,486 1,999
Irrecoverable
VAT thereon
109 87 326 262 435 349
730 587 2,191 1,761 2,921 2,348
The investment management fee is levied quarterly in arrears. Investment
management fees are charged 75% to capital and 25% to revenue.
4. Operating expenses
2006 2005
£'000 £'000
Custodian and administration fees 197 137
Directors' remuneration 104 98
Auditors' - audit services 27 24
remuneration - non-audit services 4 15
Other administration costs 304 224
636 498
The Company's total expense ratio ('TER')
calculated as a percentage of average net
assets and including expenses, after relief 1.45% 1.43%
for taxation, was:
5. Director's remuneration
The aggregate remuneration of the Directors, excluding VAT where applicable, for
the year to 31 December 2006 was £103,500 (2005: £98,000).
6. Ordinary shares
31 December 31 December
2006 2005
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 731.0p 583.5p
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 2005,
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 2005 and 2006 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 2006 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, 2 More London Riverside, London SE1 2AP on
Wednesday 25 April 2007 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, Beaufort
House, 51 New North Road, Exeter EX4 4EP.
12 March 2007
2 More London Riverside
London SE1 2AP
This information is provided by RNS
The company news service from the London Stock Exchange
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