The investment opportunity

 

HGT provides investors with a unique opportunity to participate in the growth in value of a portfolio of 46 private companies sourced by Hg. Value is created through implementing an investment strategy focused on software and business service companies with resilient, recurring revenue streams and from leveraging the network and expertise of Hg to support management teams to deliver the full potential of their respective businesses.

With highly predictable and stable cash flows, the top 20 businesses (representing 79% by value of HGT's investments) reported aggregate sales of £7.7 billion¹ and EBITDA of £2.4 billion¹ over the last 12 months, equating to an EBITDA margin of 31%.

Hg brings to HGT an experienced team of more than 300 employees, including more than 170 investment and portfolio management professionals, supported by a network of portfolio partners, all of them seasoned senior managers from across industry, who work with
the management teams of the companies in which we are invested to create value for shareholders. At the centre of this network, Hg builds and shares knowledge and expertise by facilitating the active collaboration of management teams across sector clusters and geographies.

HGT's funds are invested pro rata alongside those of Hg's other institutional clients. This enables shareholders to invest, on similar terms, alongside some of the world's largest investors in private equity, in high-growth private companies, which might otherwise be inaccessible. This allows HGT to achieve diversification across markets and geographies and gain exposure to fast growing portfolio companies at different stages of their development and size - from an enterprise value of £100 million to over £10 billion.

 

¹Source Hg: LTM 30 June 2022 revenue and EBITDA for the Top 20 investments (79% of the portfolio).

Financial and performance highlights

+1.8%¹

NAV per share (443.2p)²

30 June 2021: +21.4%

£2.0bn

Net assets

31 December 2021: £2.0bn

-20.5%¹

Share price (330.5p)

30 June 2021: +17.4%

£1.5bn

Market capitalisation

31 December 2021: £1.9bn

2.5p

Interim dividend

30 June 2021: 2.0p

1.3%

Total annualised ongoing charges

30 June 2021: 1.6%³

£71m

Cash invested on behalf of HGT

30 June 2021: £165m

£29m

Cash returned to HGT

30 June 2021: £82m

£550m¹

Available liquid resources
(27% of NAV)

31 December 2021: £470m

This includes a bank facility of £250m of which £114m was undrawn at 30 June.

£1.6bn

Outstanding commitments
(76% of NAV)

31 December 2021: £992m

Commitments will be drawn down over the next three to four years (2022-26) and are likely to be financed partly by cash from future realisations.

 

HGT can opt out of a new investment without penalty, should it not have the cash available to invest.

Top 20 investments (79% of portfolio value)

 

+31%

Top 20 LTM sales growth

30 June 2021: +20%

 

+26%

Top 20 LTM EBITDA growth

30 June 2021: +27%

 

27.1x⁴

Top 20 EV to EBITDA multiple

31 December 2021: 27.4x

 

7.5x⁴

Top 20 net debt to EBITDA ratio

31 December 2021: 7.1x

 

 

 

 

¹ NAV per share and share price returns on a total return basis assuming all historical dividends have been re-invested, available liquid resources includes liquid resources and the undrawn bank facility. These financial metrics are Alternative Performance Measures ('APM').

² Please refer to note 11(b) on page 71 of the full Interim Report and Accounts or below for further detail on the calculation of NAV per share.

³ Please refer to page 74 of the full Interim Report and Accounts or below for further detail on the calculation of ongoing charges.

⁴ These figures are calculated on a value‑weighted basis (not a straight average). Therefore, larger exposures within HGT's NAV have a higher weighting in the metrics (e.g. The Access Group). For further information on the top‑20 portfolio trading performance and valuation and net debt analysis, please refer to Hg's review below or on pages 34-35 of the full Interim Report and Accounts.

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.

 

Historical total return performance

 

Both HGT's share price and net asset value per share have continued to outperform the FTSE All-Share Index over the long-term.

 

	6 months to June 2022 %	1 year %	3 years % p.a.	5 years % p.a.	10 years % p.a.	20 years % p.a.
NAV per share*	1.8	20.6	24.4	22.2	17.0	15.9
Share price	(20.5)	(5.4)	17.4	16.7	16.9	15.7
FTSE All-Share Index	(4.6)	1.6	2.4	3.3	6.9	6.5
NAV per share performance relative to the FTSE All-Share Index	6.4	19.0	22.0	18.9	10.1	9.4
Share price performance relative to the FTSE All-Share Index	(15.9)	(7.0)	15.0	13.4	10.0	9.2

 

*Please refer to note 11(b) on page 71 of the full Interim Report and Accounts or below for further detail on the calculation of NAV per share.

 

 

Based on HGT's share price at 30 June 2022 and allowing for all historic dividends being reinvested, an investment of £1,000 made 20 years ago would now be worth £18,370, a total return of 1,737%. An equivalent investment in the FTSE All-Share Index would be worth £3,521.

 

Long-term net asset growth

 

2013 £18m £18m raised from subscription shares

2018 FTSE 250 Promotion to the FTSE 250

2019 10:1 10:1 share-split

2019 £75m £75m equity raised

2020 £25m £25m equity raised

2021 £141m £141m equity raised

2022 £12m £12m equity raised

 

Chairman's statement

 

"Despite the obvious challenges and uncertainty presented by the current macro-economic and geo-political environment, the Board remains optimistic about the future prospects for HGT. The businesses within the portfolio are resilient, and in such an environment as today's continue to provide critical solutions to their clients and reduce the costs and complexity of doing business. The long-term value creation prospects from owning such a portfolio remains attractive."

Jim Strang, Chairman, HgCapital Trust plc

 

Dear Shareholder,

The first six months of 2022 have seen a very material increase in the global risk environment all companies face. As the direct effects of the COVID-19 pandemic recede, new risks, both geo-political and macro-economic, have emerged in force and seem set to remain for the foreseeable future. The elevated level of risks that prevail and the changing expectations around economic growth, levels of inflation and interest rates have had a direct impact on stock markets around the world, with high growth companies particularly affected. These factors have dragged on the share price of HGT in the first half of the year.

Against this very challenging picture, the fundamental performance of HGT has remained robust with over 95% of the companies that make up HGT's portfolio demonstrating strong, profitable growth. The nature of these businesses, which are mission-critical to the hundreds of thousands of business end-customers they serve, has allowed them to demonstrate their resilience once again in this challenging environment. Furthermore our Manager, Hg, as a highly experienced owner of these businesses with significant operating resources, has been able to make meaningful contributions to further protect and enhance value across the portfolio.  

As I have noted in the past, the investment policy that HGT follows is one of clear focus and discipline. The clarity of this focus and the effectiveness that Hg demonstrates in its execution of this investment strategy has allowed the investment process to continue to function effectively over the course of the last six months. Three new companies were added to the portfolio during H1, either as primary platform investments or as value accreting acquisitions for existing investments, and a further three new investments were announced that are due to complete over H2 2022. As regards realisation activity, again 2022 has been a productive year-to-date with three full or partial exits announced validating the prior valuations placed on these businesses. Exits announced over 2022 have been at an average of 29% over the December 2021 carrying NAV, again highlighting the consistently conservative approach we have taken to our holding valuations.

The Board speaks regularly to its Manager, Hg, to assess the continued innovation and improvement in Hg's processes, as well as ensuring a thorough understanding of the investment strategy, as it continues to evolve, helping to ensure that Hg's operations are at the forefront of best practice in the private equity industry. This is a broad-based effort that encompasses not only the investment and value creation capabilities of Hg but also the critical topics of Sustainability, Diversity and Inclusion. 

Hg's culture of continuous improvement provides the Board of HGT with confidence to continue to support Hg as it raises new investment funds. In April 2022, the Board increased the commitment made in 2021 to Hg's latest large-cap fund, Hg Saturn 3, from $850 million to $1,075 million. The Board also agreed an initial commitment of €400 million to Hg's latest mid-market fund, Hg Genesis 10, and anticipates further commitments to follow in the coming year, as your Board looks to invest across the Hg fund family to support the long-term growth of HGT's NAV. Through this programme of commitments, HGT will continue to be Hg's largest client and the most substantial investor in its funds.

Highlights in the first six months of 2022 included:

• 1.8% NAV per share growth on a total return basis, with net assets attaining a record level of £2.0 billion;

• £71 million of new and further investments by HGT, primarily into three new businesses across the core investment clusters targeted by Hg, and significant investments made post period end;

• £29 million of proceeds returned to HGT, primarily from two refinancings with further realisations post-period at uplifts to their December 2021 book value;

• £12 million of new equity issued;

• £530 million newly committed to invest alongside new Hg funds over the next three to four years.

Performance

Following very strong performance in 2021, the NAV per share over H1 2022 has seen a small increase from £4.40 to £4.43, representing 1.8% on a total return basis.

It is important to note that valuations are applied consistently, in accordance with the IPEV Valuation Guidelines. Each company has been valued individually, based on the trading multiples of comparable businesses and relevant and recent M&A activity. Over the first six months of 2022, these valuations have reflected the impact of declines in the multiples for comparable public companies, offset by transactions at uplifts to the December 2021 book value and continued strong trading across the portfolio. There is further colour on this in the Manager's Outlook section later in the report.

The underlying performance of the portfolio saw the top 20 underlying companies (79% of the portfolio) continue to show strong growth, generating revenue growth over the last 12 months of 31% (June 2021: 20%) and EBITDA growth of 26% (June 2021: 27%) reflecting the defensive nature of the businesses in which HGT is invested.

These businesses have continued to trade successfully, despite the ongoing disruptions affecting major economies and, with their significant and predictable forward cash flows, are appropriately financed with significant covenant flexibility at an average net debt-to-EBITDA ratio of 7.5x. Currently, 93% of the portfolio by value is held above its original cost of acquisition. The total net assets of HGT at 30 June 2022 were £2.0 billion, an increase of £25 million over the reported figures at 31 December 2021. The analysis of NAV movements and attribution analysis (below or on pages 32-33 of the full Interim Report and Accounts) set out a breakdown of movements in the NAV and the underlying investment portfolio.

Over the first half of 2022, HGT's share price has fallen (on a total return basis) by 20.5%; over the last 10 years the HGT share price has seen a total return CAGR of 17%, outperforming the FTSE All-Share index by 10% per annum over the same period.

Investments and realisations

During the first half of 2022, HGT invested £71 million, primarily in three new investments, LucaNet, Pirum and Fonds Finanz, with further investment made into existing portfolio companies: Howden; Lyniate and GGW. Since the period-end, a further £465 million of investment has been made primarily into three new investments including: IFS/Workwave; Waystone and Ideagen - businesses that Hg has been tracking closely for several years before investing - and further investment into The Access Group, team.blue and Norstella. These investments all fall within Hg's eight focus 'clusters', solving workflow problems and serving the needs of similar business customer sets in comparable end-markets. Hg targets businesses with compelling market positions within these clusters, and while such companies often command a full price on acquisition, the experience and capability which Hg brings help to drive these companies to realise their full potential.

It is also worth noting that HGT currently holds around 6% of NAV in co-investments; these are investments made alongside Hg funds and are free from any fees or carried interest payable to the Manager. HGT will continue to take up co-investment opportunities as they arise and will seek to hold 10 to 15% of NAV in this strategy across different fund deployment cycles. Co-investments provide a useful mechanism to optimise the use of HGT's balance sheet capital and help reduce overall costs.

Over the first half of 2022, Hg returned £29 million to HGT, through the re-financing of Lyniate and Argus Media. Post period, Hg has announced several further exits returning c. £355 million to HGT through the sale of itm8 and Medifox and cash returns from the partial sale of Intelerad and a refinancing of The Access Group. Combined, these realisations represent an aggregate average uplift to their December valuations of 29%, with an average multiple of cost achieved of 4.2x. This consistent performance continues to reinforce the value that buyers place on the quality of the businesses within the portfolio. For further information about investments and realisations, please refer to pages 38-41 of the full Interim Report and Accounts or below.

New commitments

Long-term shareholders will be familiar with the commitment-investment-realisation cycle which underpins the HGT investment model. Every two to four years, HGT and Hg's other institutional investors make commitments to invest in funds which seek to make investments over the following three to four years. HGT thereby enables shareholders to invest alongside the world's largest institutional investors in businesses which might otherwise be inaccessible to public market investors.

In 2021, HGT committed $850 million to Hg's latest upper mid-market fund, and made a further $225 million commitment to this in the first half of 2022. Additionally, the HGT Board agreed a commitment of €400 million to Hg's latest mid-market fund over the period. We will continue to commit across Hg's fund family, ensuring that HGT can participate in all the investments made by Hg. Further detail on all commitments to Hg funds can be found on page 36 of the Manager's Review in the full Interim Report and Accounts or below.

Across all funds, HGT will continue to have the benefit of an 'opt‑out' from the commitment to invest in any individual new transaction, if HGT does not have sufficient funds available; this unique feature, is of considerable benefit to managing HGT's balance sheet efficiently.

Balance sheet

Given these new commitments, the Board increased the multi-currency revolving credit facility of £200 million to £250 million in 2021 in order to optimise balance sheet management and to help manage foreign exchange risk. We will look to increase further the facility over the course of 2022. A total of £114 million remained undrawn from this facility at 30 June 2022.

Including cash on the balance sheet, and the undrawn facility above, HGT had available liquid resources of £550 million at the end of June 2022.

As shares in HGT traded at a premium to NAV over the first quarter of 2022, HGT took the opportunity to increase balance sheet liquidity further through equity tap issuance, raising more than £12 million. When possible, the Board will continue to consider new equity issuance, providing that market conditions permit, offering existing and new investors the opportunity to subscribe to and increase HGT's equity base, while always bearing in mind our current shareholders' interests.

In addition, in recent months the Board has refreshed and updated HGT's existing share buy-back policy to ensure that the Board has the fullest range of tools to manage discount levels at its disposal.

The Board regularly reviews the balance sheet, commitment profile and available liquid resources at hand to optimise this mix for the benefit of HGT and long-term NAV growth.

Impact and responsible investment

Your Board and the Manager 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. Hg is, itself, independently certified as a carbon‑neutral company with a UNPRI assessment of Hg's approach to responsible investment of AA++ (the highest available rating). 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. For further information about this and the responsible investment focus at Hg, please see pages 28-31 of the Manager's Review of the full Interim Report and Accounts or below.

Dividend

As noted previously, HGT aims to achieve growth in the net asset value per share and in the share price, rather than to achieve a specific level of dividend. Furthermore, the ability of HGT to pay dividends is very much influenced by the capital structures of the transactions entered into by Hg and by income received on any liquid resources held subject to investment. Nevertheless, HGT will continue to provide guidance as to the broad dividend objectives and, currently, the Board expects to be able to deliver modest dividend progression.

As regards the current financial year HGT will deliver an interim dividend of 2.5 pence per share (2021: 2.0 pence per share), payable in October, following the full year dividend of 7.0 pence per share in 2021 (2020: 5.0 pence per share). The Board keeps the dividend objective of HGT under regular review and will communicate, to shareholders, further guidance on the dividend when it is practicable to do so.

For more information on the timing of the dividend and details of the dividend re-investment plan, please refer to page 13 of the full Interim Report and Accounts.

Board and corporate governance

As previously communicated, and in line with the Board's succession plan, Peter Dunscombe retired from the Board at the AGM in May 2022. Consequently, the Board undertook an externally supported search process to find a new Non-Executive Director. I am pleased to announce that Erika Schraner joined the HGT Board on 1 August 2022. Erika has a wealth of technology, software and digital expertise, as well as extensive experience in M&A, deal value creation, realisations, and finance.

The process of finding a new Director has been informed by the results of the regular Board effectiveness review, ensuring that new joiners to the Board bring with them the most relevant skills and experience for, not only today, but for the future development of HGT. In closing, I would like to extend my sincere thanks on behalf of all my Board colleagues to Peter for his many years of service and for his significant contribution to the success of HGT.

Prospects

Turning to the future, the environment of elevated risk on multiple dimensions seems set to persist, posing obvious challenges to all businesses. The companies that constitute HGT's portfolio will have to deal with the impact of a rising interest rate environment for the first time in more than a decade and also with the sharp increase in inflation witnessed around the world.  Significantly, the increase in geo-political risk around the world seems set to persist for some time. While the direct impact on HGT and its underlying investments is less material than in some other sectors, the collateral risks and in particular the threat posed by cyber attacks, are of real relevance for the HGT portfolio and the many cloud software businesses within it. This is an area of focus for the Board and one that the Hg portfolio team spend significant time on to mitigate.

Despite these obvious challenges and the uncertainty that current times present, the Board remains optimistic about the future prospects for HGT. The companies within the portfolio are resilient and defensive in such an environment, providing critical solutions to their clients and reducing the costs and complexity of doing business. Notwithstanding the high multiples that these types of business continue to attract, the long-term value creation prospects from owning such a portfolio remain very positive and the machinery Hg operates to refresh this portfolio while enhancing returns, continues to improve. The Board continues to work collaboratively with Hg to optimise the investment opportunity for HGT and shareholders, while always ensuring the many risks that prevail are as comprehensively and effectively managed as is possible.

 

Jim Strang
Chairman
9 September 2022

 

"In partnership with our Hg colleagues, whose guidance and expertise has been invaluable, we have driven successful transformation at IRIS in the past two years. The Hg portfolio team helped us roll out our Quantum Programme, which has brought disparate divisions onto a single best practice set of processes and systems, enabling us to vastly improve general efficiency and effectiveness - with the benefit of also materially improving our commercial ability to cross-sell and up-sell. Thank you for helping us maximise the potential of our IRIS success."

Elona Mortimer-Zhika, CEO, IRIS

 

Investment objective and investment policy

 

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

 

Investment policy

The policy of HGT is to invest, directly or indirectly, in a portfolio of unlisted companies where Hg believes that it can add value through increasing organic growth, generating operational improvements, driving margin expansion, reorganisation or acquisition - to achieve scale. HGT seeks to maximise its opportunities and reduce investment risk by holding a spread of businesses diversified by end-market and geography.

Risk management

HGT has adopted formal policies to control risk arising through excessive leverage or concentration. HGT's maximum exposure to unlisted investments is 100% of the gross assets of HGT from time to time. On investment, no investment in a single business will exceed a maximum of 20% of gross assets. HGT may invest in other listed closed-ended investment funds, up to a maximum at the time of investment of 15% of gross assets.

Sectors and markets

As HGT's policy is to invest in businesses in which Hg can play an active role in supporting management, Hg invests primarily in companies whose operations are headquartered or substantially based in Europe. These companies operate in a range of countries, but there is no policy of making allocations to specific countries or markets. Investments are made across a range of sectors where Hg believes that its skills can add value, but there is no policy of making allocations to sectors.

HGT may, from time to time, invest directly in private equity funds managed by Hg where it is more economical and practical to do so.

Leverage

Each underlying investment is usually leveraged, but no more than its own cash flow can support, in order to enhance value creation; it is impractical to set a maximum for such gearing across the portfolio as a whole. HGT commits to invest in new opportunities in order to maintain the proportion of gross assets which are invested at any time, but monitors such commitments carefully against projected cash flows.

HGT has the power to borrow and to charge its assets as security. The articles restrict HGT's ability (without shareholders' approval) to borrow to no more than twice HGT's share capital and reserves, allowing for the deduction of debit balances on any reserves.

Hedging

Part of HGT's portfolio is located outside of the UK, predominantly in northern Europe, with a further part in businesses which operate in US dollars. HGT may therefore hold investments valued in currencies other than sterling. From time to time, HGT may put in place hedging arrangements with the objective of protecting the sterling translation of a valuation in another currency. Derivatives are also used to protect the sterling value of the cost of investment made or proceeds from realising investments in other currencies, between the exchange of contracts and the completion of a transaction.

Commitment strategy

HGT employs a commitment strategy to ensure that its balance sheet is managed efficiently. The level of commitment is regularly reviewed by the Board and Hg.

Liquid funds

HGT maintains a level of liquidity to ensure, as far as can be forecast, that it can participate in all investments made by Hg throughout the investment-realisation cycle. At certain points in that cycle, HGT may hold substantial amounts of cash awaiting investment. HGT may invest its liquid funds in government or corporate debt securities, or in bank deposits, in each case with an investment grade rating, or in managed liquidity funds which hold investments of a similar quality.

If there is surplus capital and conditions for new investment appear to be unfavourable, the Board will consider returning capital to shareholders, probably through the market purchase of shares.

Any material change to HGT's investment objective and policy will be made only with the approval of shareholders in a general meeting.

 

Business model and risk framework

 

The Board has a clear view of the rationale for investing in unquoted businesses where the private equity ownership model has the potential to accelerate the growth in value creation. HGT seeks to capture this upside, whilst operating within a rigorous risk-management framework.

 

The Board believes that there is a convincing rationale for directly investing in well-researched private businesses where there is potential for substantial growth in value, notably where there is the ability to work with management to implement strategic or operational improvements.

HGT offers a simple and liquid means by which shareholders can invest in unquoted growth companies, while benefiting from an investment company's governance model.

Business model

To achieve HGT's investment objective and within the limits set by the investment policy, HGT is an investor in unquoted businesses managed, and in most cases controlled, by the Manager. From time to time, HGT may hold listed securities in pursuit of its investment policy.

HGT is currently invested in 46 companies (as set out below or on page 44 of the full Interim Report and Accounts or below), ranging in size, sector and geography, providing diversification.

The Board has delegated the management of HGT's investments to Hg Pooled Management Limited (the 'Manager' or 'Hg'). Further details of the terms of the management agreement are set out on page 74 of the full Interim Report and Accounts or below. The Manager invests predominantly in unquoted software and business service companies in expanding sectors and provides portfolio management support. Hg's review on pages 32-37 of the full Interim Report and Accounts or below outlines how HGT's investments are managed on behalf of HGT.

Most of HGT's investments are held through special-purpose partnerships, of which it is the sole limited partner.

Periodically, HGT enters into a formal commitment to invest in businesses identified by the Manager, alongside institutional investors which invest in an Hg Limited Partnership Fund. Such commitments are normally drawn down over three to four years. The institutional investors and HGT invest on similar terms.

HGT is usually the largest investor in each business. The Board has a further objective of keeping HGT as fully invested as is practicable, while ensuring that it will have the necessary cash available when a new investment arises.

The Board, on the advice of the Manager, makes assumptions about the rate of deployment of funds into new investments and the timing and value of realisations. However, to mitigate the risk of being unable to fund any draw-down under its commitments to invest, the Board has negotiated a right to opt out, without penalty, of its obligation to fund such draw-downs, should the need arise.

HGT may also take up a co-investment in some businesses (in addition to the investment which it has committed to make).

Typically, HGT has no liability to pay fees on such co-investment and no carried interest incentive is payable to the Manager on realisation (currently 6% of HGT's NAV is in co-investments). HGT may also offer to acquire a limited partnership interest in any of Hg's funds, in the event that an institutional investor wishes to realise its partnership interest.

The Board regularly monitors progress across all of the businesses in which it is invested as well as their valuation, the development of the Manager's investment strategy and the resources and sustainability of the business model.

Investment trust status

As HGT is constituted as an investment trust and its shares are listed on the London Stock Exchange, it can take advantage of tax benefits available to investment trusts. This allows HGT to realise investments from its portfolio without liability to corporation tax. The Board intends to retain this status provided that it is in shareholders' interest to do so. This will require the Board to declare dividends so that not more than 15% of taxable income is retained each year.

Performance targets

HGT's aim is to achieve returns in excess of the FTSE All-Share Index over the long term. In the year to 30 June 2022, HGT's NAV per share increased by 1.8% on a total return basis. The FTSE All-Share Index decreased by 4.6% on a total return basis over the period. The year to date total return of HGT's share price decreased by 20.5%. NAV per share has grown by 17.0% p.a. compound over the last 10 years and 15.9% p.a. compound over the last 20 years. The share price has seen broadly similar performance growing by 16.9% p.a. compound over the last 10 years and 15.7% p.a. compound over the last 20 years.

All of the above returns assume the reinvestment of all historical dividends. The Board and the Manager aim to continue to achieve consistent, long-term returns in this range.

HGT is not managed so as to achieve any short-term performance relative to any index. The Board also compares HGT's NAV and share price performance versus other comparable indices with similar characteristics.

Dividend

The Board reviews HGT's approach to dividends on a regular basis, taking into consideration feedback from shareholders and the evolving nature of HGT's income streams, which are driven by the investment structures Hg utilises in its various transactions. In the 2021 Annual Report, the Board stated that it regarded a 5.0 pence full year dividend as a sustainable level, absent some material shift in underlying deal structures. From time to time, the pattern of deployment and the income which arises may allow for a higher level of dividend to be supported, and 2021 was an example of this, with a full year dividend of 7.0 pence. The Board has declared an interim dividend in 2022 of 2.5 pence (2021: 2.0 pence).

It is important to note that HGT, in order to qualify for investment trust tax status, can retain no more than 15% of its gross income.

Going concern

HGT's business activities, together with those factors likely to affect its future development, performance and financial position are described in the Board's Strategic Report and Hg's Review. The financial position of HGT, its cash flows, liquidity and borrowing facilities are described in the Strategic Report. The Directors have considered the FRC Guidance on Risk Management, Internal Control and Related Financial and Business Reporting and believe that HGT is well placed to manage its business risks successfully. The Directors review cash flow projections regularly, including important assumptions about future realisations and the rate at which funds will be deployed into new investments. The Directors have a reasonable expectation that HGT will have adequate resources to continue in operational existence for at least the next 12‑month period from the date of approval of this Report and to be able to meet its outstanding commitments. Accordingly, they continue to adopt the going concern basis in preparing these results.

 

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.

 

Principal and emerging risks and uncertainties

During the period, the Board has continued to develop and refine a comprehensive Risk Management Framework to assess the principal and emerging risks facing HGT. Managing risk is fundamental to the sustainable long-term delivery of HGT's strategy and this framework provides the objective context for decisions taken by the Board, particularly as they relate to performance, liquidity, valuation and business model.

The Risk Management Framework is dynamic and used by the Audit, Valuations and Risk Committee ('AVRC') to assess the probability and likely impact of principal risks, to ensure that HGT operates within a defined risk appetite for each risk category, and that focus is maintained upon those risks which require attention, prioritising mitigating actions from both HGT and the Manager. This risk register is regularly stress-tested, providing assurance that the performance of HGT is insulated, as far as practical, from exogenous factors in the operating environment.

The Risk Management Framework provides the toolkit to measure and stress test HGT's business planning against a rapidly changing global backdrop. During 2021, the resilience of HGT's investment model was thoroughly tested by the conditions of the global pandemic, as was the performance of the portfolio companies. 

In the 2021 annual report, the potential effects of increasing interest rates, cost inflation and a tightening fiscal environment were discussed, and in H1 2022, the UK economy has experienced the compounding effects of accelerating inflation, interest rate rises and a tightening of the markets for new debt and equity issuance. Against this environment, the resilience of the portfolio investments and their valuations has continued to be demonstrated although the overall level of risk is now beyond the Board's stated risk appetite.

Looking forward, the Board and AVRC recognise that the more challenging environment is likely to cause the level of mitigated risk to remain elevated throughout 2022. Whilst the revenues and operations of Hg's portfolio companies are not significantly reliant upon the economies of Russia or Ukraine, the heightened geo-political uncertainty in Eastern Europe is a continuing risk that has been seen to lead to broader economic impacts, including material increases in energy costs and cyber-crime. The Board and AVRC, following careful consideration, have determined that it is appropriate to accept this elevated level of risk on a temporary basis and remain confident in the resilience of the business models of the underlying portfolio investments. Further mitigating actions will be taken should the overall level of risk continue to remain beyond the Board's stated risk appetite.

HGT considers the principal risks to be in four main categories:

Investment Risk: the risk to HGT that inappropriate investment or realisation decisions reduce the returns made.

Financial Risk: the risk that HGT's valuation, liquidity or resources are insufficient to allow HGT to invest.

Operational Risk: the risk of changing regulation: failure of Hg's processes and internal control systems and underlying portfolio performance.

External Risk: the risk of adverse macro-economic, regulatory or geo-political change.

 

Risk trend:    ↑improving              - stable             ↓ worsening

Appetite:        √ within                    X outside

 

 

Potential risk	Potential impact	Mitigation                                                                  Trend/Appetite
Investment
Performance Risk that underlying portfolio companies underperform.	• Reduction in NAV • Reduction in share price • Reputational damage	• Deployment of capital is a rigorous process determined by the Hg Investment Committee, operated by experienced investment professionals. • Portfolio performance is reviewed regularly by Hg's Realisation Committee comprising experienced investment professionals and the HGT AVRC. • An operational performance group interacts across the portfolio to drive performance.              • Realisations continue to be made at or above valuation.	- √
Financial
Valuations Risk that inaccurate valuations would lead to a misleading NAV.	• False market in HGT shares • Reputational damage • Reduction in share price • Constrained access to capital	• Valuations are prepared in accordance with IPEV guidelines and tested against HGT's Valuation Policy. • The Manager's Valuation Committee, independently chaired, reviews and approves valuations quarterly. • The auditors of both Hg funds and HGT review the valuation and methodology as part of their audit procedures. • The AVRC reviews and cross-checks valuations against a broad range of objective valuation methodologies.	- √
Liquidity Risk that insufficient liquid resources are available to make investments.	• Reputational damage • Reduced NAV growth • Reduced shareholder return	• Borrowing structures and cash flow forecasts are considered at each HGT Board meeting. • An additional £250 million of liquidity is available through a bank facility, which was 54% drawn at 30 June 2022. • An opt-out facility is available across all investing funds.	- √
Commitment Risk that capacity is insufficient to underwrite future commitments to Hg funds.	• Reduced shareholder return • Reduction in share-price	• A bank facility is in place to facilitate orderly management of the balance sheet. • There is an opt-out facility across all investing funds. • A five year cash and commitment forecast is independently reviewed by the AVRC.	- √
Operational
Regulation Risk that regulation changes affect investment trust status.	• Increased corporation tax, leading to higher fees and potential impact on valuation • Reduction in share price	• The Manager monitors investment movements, forecast income and expenditure and retained income (if any) to ensure compliance with sections 1158 and 1159 of the CTA. • Continuing investment trust status is certified by the Manager at each meeting of the Board.	- √
Regulation Risk that other changes in legislation, regulation or government policy could influence the decisions of investors.	• Misunderstood or misreported regulation leading to reduced demand for shares • Lack of adherence to regulation leading to reputational risk	• Regular compliance and risk reviews are reported to the Board by the Manager's compliance team. • Strong shareholder engagement through: - dedicated investor relations team - corporate broker - company secretary	- √
Manager internal controls and processes Risk that control weaknesses of the Manager lead to poor performance or non-compliance with regulations.	• Reputational damage • Reduced shareholder returns	• The Manager is regulated and supervised by the FCA. • The Manager has controls in place, including those related to investment decisions; portfolio reviews; recruitment, training and promotions; financial performance and payments; protection of client assets; compliance; regulation. • The Board of HGT and its auditors regularly review these processes and controls.	- √
Cyber security Risk of cyber attack and data loss at Hg and portfolio companies.	• Loss of or lack of control over data due to cyber attacks • Reputational damage • Regulatory sanction	• Increased investment in the  portfolio cyber security team to monitor cyber security across Hg and the portfolio companies and mandate improvements. • The GDPR Committee has successfully implemented mandatory training for all staff.	- X
External
Political and macro-economic uncertainty Risk arising from geo-political instability and conflict.	• reduction in valuation of portfolio investments • disruption to capital markets	• Hg's portfolio is diversified with a high degree of recurring revenue. • The Manager remains focused on the various issues which may need to be addressed, including: - reduced availability of credit to fund future investments - regulation, marketing, trade and foreign exchange movements • These are regularly monitored by the Board of HGT, considering a range of downturn scenarios in our business planning.	- X
Foreign exchange Risk of foreign exchange movements affecting investments made in currencies other than Sterling.	• Reduction in shareholder returns	• The Board of HGT regularly monitors currency fluctuations. • The Hg treasury functions hedge currency exposure and actively mitigate currency risk where appropriate.	- √
Global pandemic Risk of performance and investment disruption from current and future pandemic events.	• Portfolio companies suffer revenue declines • Earnings multiples of listed companies applied to valuations might be adversely affected	• Portfolio resilience is stress-tested against pandemic impacts. • The majority of revenues are derived from subscription-based recurring revenues for non-discretionary technology-led services. • Operational performance, valuations and investment deal flow have shown resilience to pandemic disruptions. • All operating territories are now free from material restrictions.	↑ √

 

 

Interim management report and responsibility statement

Interim management report

The important events which have occurred during the period under review are described in the Chairman's Statement and in the Manager's Review - these also include the key factors influencing the financial statements.

Statement of Principal Risks and Uncertainties

The principal risks faced by HGT can be found under the heading 'Principal and Emerging Risks and Uncertainties' within the Rationale and business model section above or on pages 14-18 of the full Interim Report and Accounts. HGT's principal risks and uncertainties have not changed materially since the last annual report and are not expected to change materially for the second half of HGT's financial year. The Directors have ensured that all principal risks will be kept under review throughout the year.

Related party transactions

There have been no material changes in the related party transactions described in the last annual report.

Going concern

As stated in note 2 to the condensed financial statements, the Directors are satisfied that HGT has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the condensed financial statements.

Responsibility statement

The Directors confirm that, to the best of their knowledge,:

•  the condensed set of Financial Statements has been prepared in accordance with FRS 104 'Interim Financial Reporting' and gives a true and fair view of the assets, liabilities, financial position and return of HGT.

•  the interim management report (incorporating the Chairman's Statement and the Manager's review) includes a fair review of the information required by:

(a)   DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events which have occurred during the first six months of the financial year and their impact on the condensed set of financial statements - and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b)   DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related-party transactions which have taken place in the first six months of the current financial year and which have materially affected the financial position or performance of HGT during that period - and any changes in the related-party transactions described in the 2021 annual report which could have a material effect on the financial position or performance of HGT in the first six months of the current financial year.

 

We consider the interim report and accounts, taken as a whole, to be fair, balanced and understandable and to provide the information necessary for shareholders to assess HGT's position and performance, business model and strategy.

This interim financial report was approved by the Board of Directors on 9 September 2022.

 

Jim Strang

Chairman

9 September 2022

 

Hg's review

 

Building businesses which change how we all do business

 

Hg is a specialist private equity investor focused on software and business service companies.

Our business model combines deep sector specialisation with dedicated operational support.
Hg invests in growth companies in expanding sectors, primarily via leveraged buyouts in businesses with operations in or across Europe.

Hg's vision is to be the most sought-after private equity investor within our sector focus,
being a partner of choice for management teams, to provide consistent, superior returns for HGT and our other clients, while providing a rewarding environment for Hg colleagues.

 

References in this interim report and accounts to the 'portfolio', 'investments', 'companies' or 'businesses' refer
to a number of investments, held as:

•   indirect investments by HGT through its direct investments in fund-limited partnerships (HGT LP, HGT 6 LP ('G6'),
HGT 7 LP ('G7'), HGT 8 LP ('G8'), HGT Genesis 9 LP ('G9'), HgCapital Mercury D LP ('M1'), HGT Mercury 2 LP ('M2'), HGT Mercury 3 LP ('M3'), HGT Saturn LP ('S1'), HGT Saturn 2 LP ('S2') and HGT Saturn 3 LP ('S3').

•   direct investments in renewable energy fund limited partnerships, Asper Renewable Power Partners LP
('Asper RPP I LP'), of which HGT is a limited partner.

Hg Pooled Management Limited was authorised as an alternative investment fund manager with effect from
22 July 2014. For further details, refer to pages 132-134 of the 2021 Annual report  https://www.hgcapitaltrust.com/sites/hgcapital-trust/files/all-pdf/full-year-results-2021/hgt-annual-report-and-accounts-2021.pdf.

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.

 

About Hg

Europe's largest software and services investor with a transatlantic network

 

>25

years of investment

 

>300

employees across London, Munich, New York, San Francisco and Paris

 

>200

highly regarded institutional investors

 

>$55bn

funds under management

 

Overview

Hg is, itself, an entrepreneurially led, fast-growing business, 100% owned and managed by its partners.

Hg began life as Mercury Private Equity, the private equity arm of Mercury Asset Management plc. Mercury Asset Management was acquired by Merrill Lynch in 1997. In December 2000, the executives of Mercury Private Equity negotiated independence from Merrill Lynch, and Hg was established as a fully independent partnership.

Since then, Hg has worked hard to develop a unique culture and approach - setting us apart from other investors. We are committed to building businesses which change the way we all do business, through deep sector specialisation and dedicated, strategic and operational support.

Today, Hg has more than 300 employees, representing the largest technology investment team in Europe.

We have five investment offices, which are in London, Munich, New York, San Francisco and Paris, with funds under management of more than $55 billion (£45 billion) and serving more than 200 highly regarded institutional investors, including private and public pension funds, insurance companies, endowments and foundations.

HGT is the largest client of Hg, which has been contracted to manage HGT's assets since 1994 and offers investors a liquid investment vehicle, through which they can obtain exposure to Hg's diversified network of unquoted investments with minimal administrative burdens, no long-term lock up or minimum size of investment - and with the benefit of a Board of independent Directors and corporate governance. HGT's strategy is to invest in parallel with all of Hg's current funds.

Investment strategy

Hg's investments are focused primarily on defensive growth buyouts in software and business service companies operating in specific end-market 'clusters' with enterprise values ('EVs') of £100 million to over £10 billion, growing faster than the broader economy. We predominantly seek controlling equity buyout investments in businesses headquartered in Europe and North America, though such companies will often have a global footprint and customer base.

Hg's objective is to pursue investment theses supporting long-term growth, leveraging its expertise working in these sectors to implement initiatives designed to maximise organic expansion, as well as through rolling up fragmented sectors, over typical hold periods of approximately five years.

Hg has led over 175 investments in the software and service sector during the last 25 years. This focus means that we have developed an institutional expertise and a deep understanding of the markets and businesses in which we invest.

Hg applies a rigorous approach when evaluating all investment opportunities. Our objective is to invest in the most attractive businesses, rather than be constrained by a top-down asset allocation.

This flexible approach to investment means that, at any given time, the Hg portfolio is likely to comprise over 40 software and tech-enabled business service companies with similar characteristics, but of different sizes, end-market focus and maturity profiles.

Hg's offices in New York and San Francisco enhance the ability to crystallise and develop transatlantic investment opportunities, manage existing investments and make bolt-on acquisitions, as well as continue to engage with - and ultimately sell - portfolio companies to North American trade buyers. As the US has the largest technology sector, this also helps to consolidate Hg's position as Europe's leading software investor.

Note: All figures as at 30 June 2022.

Hg Mercury

Lower mid-market

EVs: £100m-£450m

 

Hg Genesis

Mid-market

EVs: £450m-£1.3bn

 

Hg Saturn

Upper mid-market

EVs: >£1.3bn

One strategy over three funds across the size range in software and service businesses

HGT has made commitments to invest on the same financial terms as all institutional investors in Hg funds, with investments made into businesses with enterprise values ranging from £100 million to over £10 billion.

 

The power of the portfolio

Hg has a unique approach and strategy, with a focus on achieving scale in tightly defined clusters of expertise.

As a result, we have assembled a portfolio of 46 companies, sharing similar characteristics, yet differing in size and maturity. This creates a natural environment for knowledge-sharing, creating a network effect to drive best practices and value-creation initiatives. This is why we believe in collaboration and the 'power of the portfolio'.

This scale and focus enable our businesses to benefit from being part of one larger organisation, while retaining their own identity with each management team, incentivised by their own success.

 

The Hg portfolio, if taken as one company, would be one of the largest and fastest-growing software companies in Europe.

 

The 'Hg sweet-spot' business model

Hg has a clear and robust business model, focused on long-term, consistent and defensive growth, predominantly through investment in buyouts located throughout Europe and North America. We seek companies which share similar characteristics, often providing a platform for merger and acquisition ('M&A') opportunities.

We believe that such companies have the potential for significant performance improvement.

 

We invest primarily in two main market sectors:

Software

Software is our largest sector of investment. We focus on businesses providing B2B vertical market application software and data, regulatory software and fintech and internet infrastructure.

We have invested in high-quality industry champions which have strong sector reputations and diverse customer bases and which feature subscription-based business models generating predictable revenues and cash flows. With more than 40 software investments in our portfolio, we bring a unique set of networks and insights to help to support value creation in our businesses.

Tech-enabled services

Our business services investments focus on companies with high levels of intellectual property, large fragmented customer bases and long-term and stable customer relationships - and businesses which provide business-critical services, preferably on a repeat or recurrent basis.

We target businesses with strong reputations within a niche and aim to grow and scale these businesses, either organically within existing markets or through acquisitions.

 

Deep knowledge and networks within our end-market clusters

Hg has a unique approach and strategy, with a focus on achieving scale in tightly defined clusters of expertise. This specialisation helps us to build deep know-how.

 

Tax & Accounting
18+ years
TeamSystem • Visma • Iris • Sovos • Azets • Silverfin • Prophix • CaseWare • Bright • insightsoftware • Serrala • LucaNet

 

ERP & Payroll
18+ years
TeamSystem • Visma • Iris • Access • Transporeon • P&I • Benevity • Revalize • Bright • IFS/Workwave

Legal & Regulatory Compliance
15+ years
The Citation Group • Litera • Septeo • ProcessMap • waystone

 

Automation and Engineering
14+ years
MeinAuto • Trackunit • AUVESY-MDT • Geomatikk • revalize

 

SME Technology Services
12+ years
Commify  • team.blue • F24 • The Citation Group

 

Capital Markets & Wealth Management IT
9+ years
FE Fundinfo • Argus • SmartTrade • Gen II • Riskalyze • Pirum • waystone

 

Insurance
8+ years
GGW Holding • Howden Group • Fonds Finanz

 

Healthcare IT
7+ years

Lyniate • Medifox •Intelerad • HHAeXchange • norstella

 

Note: Number of years refers to the number of years for which Hg has invested in each cluster. As at 30 June 2022.

Working together

"With our focused yet scaled portfolio, we have a unique opportunity to provide deep, systematic support to management across all the key value creation levers our types of businesses offer."

Christopher Kindt, Head of Value Creation, Hg

Sharing Hg know-how and experience

By virtue of the fact that Hg invests repeatedly in specific business models, our dedicated Portfolio Team has been able to develop an approach to drive value creation during our ownership. Following each investment, our portfolio team works with the management of our investee companies to focus on a set of operational levers which is key to performance in an 'Hg sweet‑spot' business model: growth, technology & product, business systems and processes, cyber security, data and AI, ESG, talent, planning and finance. For each of these levers, the portfolio team has the experience and deep knowledge of best practices to help drive value creation.

Every company can access the team and their IP, yet the nature of support can take a variety of forms. Often, our Portfolio Team members provide direct support, co-owning and driving specific initiatives to help the business create value more quickly. Another option is for our experienced industry experts to mentor senior executives, helping them to build more scalable functions. In other instances, the support comes through introducing management teams to their counterparts in other companies in which Hg is invested, specifically those who have faced comparable challenges.

66

C-suite and board placements led by in-house talent team over last 3 years

>$30m

of software cost savings for our portfolio from Hg's collective deals

>$40m

ARR delivered through the data monetisation driven by Hg Data Scientists

Value creation

•  We have over 50 senior operational specialists who work with our portfolio management teams to drive impact through specific value creation projects. Each specialist maintains a network of trusted third party associates and partners to further drive execution.

•  The Portfolio Team continually invests in codifying operational best practices, developing IP that represents decades of accumulated expertise. This yields templates and blueprints that enable best practices to be implemented swiftly. Increasingly, these are embedded in proprietary Hg software tools and services to deliver value even more rapidly.

•  We seek to use our collective scale to access better commercial terms with key partners and vendors. For example, Hg collective deals are saving more than $30 million p.a. of cost on back-office system license costs alone across our portfolio.

•  We conduct value creation diagnostics upfront, benchmarking a company's operational maturity against our database of KPIs and best practices, to identify the highest potential projects to pursue.

•  We then support the company in building a value creation plan to help achieve those enhancements. As part of this planning we identify where our IP and experts can help the company sharpen and accelerate their improvements.

Portfolio Team days worked on the portfolio, April to June 2022, annualised

Data        1,355

Tech         926

BST¹         839

Talent      818

Growth    685

VCP²        648

¹ Business Systems & Transformation    ² Value Creation Planning

 

"We joined the Hg Portfolio family at the end of 2021, and we are definitely proud to be a part of it now. Our experience with the entire team has been beyond cooperative. The network and expertise the Hg Portfolio Team offers is exceptional and will certainly help us to improve in some aspects of our business."

Markus Kiener & Norbert Porazik, CEOs, Fonds Finanz

Portfolio events

The Portfolio Engagement team runs an extensive calendar of virtual and in-person events for executives from across the portfolio. By bringing together the management teams of portfolio companies with similar business models, the Hg portfolio events provide attendees with invaluable opportunities to build connections, problem-solve, and share experiences. In 2021, the Portfolio Team held 88 events overall reaching close to 6,000 people and driving engagement across the entire portfolio. 

Our focus areas

From sharing best practice and resources, through to tailored teams of technical experts, we work closely with the companies in which we invest to ensure that they gain the tools and guidance required for business success.

 

Growth
Sales
Marketing
Pricing
Customer Success & Operations

 

Tech, Product, Cyber

R&D and tech platform
Right-shoring
Product management
Cyber security

 

Data
BI, warehousing, snowballs
Data cleansing & enrichment
ML driven optimisations
Data monetisation

 

Projects Support
First 100-days, onboarding
Value Creation Planning
PMO and governance
DSP Accelerator Program

 

Talent and Org
Exec search
Management assessments
Org design and structure
CHRO topics: hiring, L&D, etc

 

Finance and FP&A
Reporting and analysis
CFO & Finance team set-up
Special projects (e.g. exit prep)
ERP implementation

 

ESG and Legal
Assessments & reporting
Legal support, strategic projects
Professionalising GC office
Carbon reduction, ESG support

 

Business Systems
Enterprise Systems Architecture
Systems selection, vendor deals
Implementation support
Process design & transformation

 

Geographic Coverage
UK, Europe, US
In-person when needed
Multi-lingual2022 YTD:

35

Portfolio team-led online and in-person events

>1,000

total people in attendance

 

 

The Hg Portfolio community

We view all our business management teams as a part of the Hg portfolio community and that means promoting a culture of working together to problem solve and innovate more rapidly. One of the most powerful ways in which we motivate change is through peer‑to‑peer collaboration, allowing management teams the opportunity to exchange ideas and insights, and learn from others across the Hg portfolio and our network of experts. In the last year, we've offered portfolio companies a full end‑to‑end digital engagement experience, by hosting virtual events and facilitating an increase in activity on the Hg online collaboration platform, Hive.

Hive

Hg's online community for everyday collaboration

Hive, Hg's online portfolio engagement platform, enables collaboration at scale across the entire Hg family and plays a central role in Hg's value-add proposition to portfolio companies. By facilitating engagement opportunities across the thousands of people who are a part of the portfolio of Hg-invested businesses, Hive provides members with a space to network with peers, and share specialist knowledge, experience and expertise.

Spotlight on our CEO community

Our CEO community has gone from strength to strength over the last few years. We held our first in-person CEO event in France earlier this year and in October will launch our inaugural Hg North America CEO & Chair Forum in the US. The CEO hangouts have proven an invaluable touchpoint for the community and continue on a monthly basis. These virtual meetings provide an opportunity for our CEOs to share live experiences, problem-solve and seek advice from one another, with many CEOs now referring to the virtual gatherings as a chance to connect with a 'group of friends'.

 

2022 YTD:

3,000

active members and growing

21

Live communities

 

 

 

 

For further information, please visit hive.hgcapital.com

For further information, please visit hgcapital.com/working-together

"Over the last few years we have continued to invest in our people and our expertise, especially given our focus on working with the very best management teams in our target clusters and to actively help them to build great businesses."

Steven Batchelor, Chief Operating Officer, Hg

 

>300

members of the team

5

investment offices in London, Munich, New York, San Francisco and Paris

>170

investment and portfolio management executives

8

clusters of expertise

 

Our team

Hg succeeds through the analysis and understanding of new and emerging dynamics in the clusters in which it invests. This requires profound knowledge of technology, markets and business practices. To this end, we employ diverse and exceptionally talented teams to identify and execute investment opportunities and accelerate value creation during our ownership. This specialisation - in both investment selection and portfolio management - requires significant resources, and we have built a business employing more than 300 people, including more than 170 investment, portfolio management executives and other professionals. Our investment and portfolio management executives come from a range of backgrounds and experience, including private equity, consulting, investment banking, accounting and industry specialists. Our portfolio team comprises a mix of senior operators and functional specialists, typically with substantial experience in their respective specialist operational and strategic roles. Investing primarily in European businesses, many of which have a global footprint, requires time and a deep understanding of local cultures. Accordingly, our people come from around the globe, and have representation of 42 different nationalities. On average, our partners have 15 years' experience in the management of private businesses.

In September 2022 we opened two new investment offices in San Francisco and Paris increasing our global reach.

Talent attraction and talent development

To position ourselves as a best-in-class recruiter, Hg's recruitment and selection processes are rigorous and agile. These, along with our strong brand, leadership, sector focus, fund performance, vibrant culture and only working with recruitment partners who ensure that their search methodology is inclusive, providing diverse talent, allow us to attract and hire the best talent in our industry.

We have enhanced our talent processes so that we can identify and accelerate the development of our top performers and high‑potential talent within the business. We believe this to be the basis of effective career and succession‑planning which is led by our Head of Talent, who joined in January this year to focus on and to continue to build and enhance our practices.

Employee engagement

Our people are highly motivated by, and committed to, delivering outstanding value to HGT, our other institutional clients and our portfolio company leadership teams. They participate through their work, our values and the opportunity to grow to their full potential within Hg. Our values have evolved over many years and are embodied in our working culture; these are aligned with our performance and reward structures. Hg works hard to ensure that our employees are fully involved. We use independent external benchmarks to gauge levels of engagement and take appropriate actions to ensure the highest possible levels of commitment here. We have a strong focus on career and personal development, providing a range of development opportunities to enable our talent to reach their full potential and perform at their best.

Developing future leaders

We are explicit about those behaviours which we wish to encourage at Hg and have aligned recruitment, learning and development, coaching, performance and rewards to our values for everybody across the organisation, including our leadership. We know that longevity of success means doing it the right way, thinking long term and always being willing to listen and learn. These values can be seen and felt everywhere you look, around our offices and in everyday interactions - it's really what makes us Hg.

 

For a description of Hg's key staff please visit: hgcapital.com/our-people

 

"With diversity, you source and analyse deals, ask and answer questions and manage teams differently. It adds up to better investment and business decisions. The more complex the challenge at hand, the greater the returns."

Nic Humphries, Senior Partner, Hg

 

 

Diversity and inclusion

Hg has introduced several new policies and built on its existing ones, as part of a wider initiative around diversity and inclusion. We have an established D&I steering group, comprising a range of individuals from across the firm. Its aim is to promote a culture of inclusion which clearly values diversity in all of its forms. We have several global initiatives - with four networks covering gender, ethnicity, socio-economic and LGBTQ+, flexible working, mentoring programmes, education and awareness events - to drive internal change. We also look to support events such as Black History month, International Women's day and Mental Health Awareness week. This is also echoed and supported through our HR learning and development initiatives, including structured mentoring programmes, recruitment processes and training, embedding awareness of unconscious bias and inclusion.

Hg will maintain its commitment to industry-wide initiatives such as Level 20, a not‑for‑profit organisation aligned around a common vision to inspire more women to join the industry.
Hg senior partner Nic Humphries continues his role on Level 20's advisory council.

Hg is an active participant in the Institutional Limited Partners Association's 'diversity in action' initiative, acknowledging our ongoing commitment to take concrete steps to advance diversity, equity and inclusion across our organisation and the industry more broadly.

In addition, in our second year working with #10000 Black Interns we welcomed several interns through the programme, helping black students gain experience and kick‑start their career in investment management. This year we have increased the number of interns we have recruited and expanded the number of areas of the business that they will gain experience in.

We are also excited to partner with Sponsors for Educational Opportunity (SEO) in London and New York as they help prepare talented students from ethnic minority or low socio-economic backgrounds for career success.

 

"At Hg, our ambition is to be the employer of choice in private equity and we have a robust strategy enabling us to attract, develop and retain world class diverse talent. Everybody at Hg is accountable for contributing to our inclusive culture, and ensuring people can be their whole self at work."

Kerry Heaton, Head of Talent, Hg

 

Hg is now a member of the LGBT Great network and as part of this partnership has contributed to two of their research projects: LGBT+ investing lens, research exploring the practice of investing for financial return while also considering the benefits to those who identify as LGBT+, such as improving economic opportunities or social inclusion for the LGBT+ community.

Responsible investment

 

"In the past six months, Hg has focused on a number of initiatives to advance our ESG performance. We made some big commitments in 2021, including setting targets approved by the Science Based Target initiative. We are now focused on delivering against these commitments. I am delighted to have had the opportunity to grow our ESG team from two to four members, which means more time can be spent delivering additional impact across the Hg portfolio and providing further transparency to our investors. For example, we now collect scope 1, 2 and 3 emissions data for our portfolio companies and are supporting them with benchmarking and identifying reduction opportunities."

Caroline Löfgren, Chief Sustainability Officer, Hg

 

Why responsible investment is important to us

Hg engages in Responsible Investment because it sits right at the core of its Purpose: 

Hg is trusted to improve the future of millions of investors by building sustainable businesses for tomorrow. These are carefully chosen words - trust, future, sustainable, tomorrow. Choosing how we do business.

What this means in practice is that Hg looks to grow sustainable businesses which are great employers and good corporate citizens, whilst also generating strong returns for the millions of pensioners and savers who are invested in the Hg funds. Everyone at Hg is ultimately pulling together towards this goal. 

This commitment supports the backbone of Hg's investment philosophy and has helped the firm to determine a very focused approach, which has evolved over the last 20 years. Hg's focus is to invest exclusively in growing software and services businesses. They look to ensure that both time and capital support the sustainable growth of these knowledge businesses. These businesses then contribute to society by changing and modernising how their customers work, whilst providing quality employment opportunities for thousands of people worldwide, across innovative and growing sectors. 

Stable growth is crucial to Hg. It provides stability to those beneficiaries that Hg serves including teachers, public servants, first-responders and charities - there are pension savers all around them who are benefitting from this stability for their future.

As with other operations and functions, Hg takes an active interest in how its portfolio companies manage Environment, Society and Governance ('ESG') risks and opportunities. Hg's portfolio team consist of over 50 experts, four of whom are specialists in ESG and provide support to portfolio companies to help them advance their ESG agenda. Hg's sector focus and expertise mean that they have a good understanding of which ESG metrics are most material to service and software companies. The team focuses on these metrics to help build best-in-class ESG practices across the Hg portfolio. 

Finally, Hg actively champions this topic and talks about its approach openly both internally and externally. They want all their employees to be proud of what they do, because they should be, and they want their investors to be confident in Hg's intentions when they commit capital to them for ten years or more.

Matthew Brockman, Managing Partner, Hg

 

For more information and to watch our Responsible Investing video, please go to hgcapital.com/responsibility

 

Climate Change

Hg recognises that climate change is one of the most pressing topics today. It is at the top of the agenda for society, regulators, Hg and its investors. Acting on climate change is important and working collaboratively is critical to driving material change. Hg is a founding member of the UK network of the Initiative Climat International ('iCI') which is a network of Private Equity firms working collaboratively to tackle climate change in its industry endorsed by the UNPRI. Hg is a member of the UK Operating Committee of iCI and the NetZero and Carbon Footprint working groups. In 2021, Hg worked with its peers in the iCI to fund and develop guidance on how PE firms can set science-based targets and Hg became one of the first PE firms globally to get approved Science Based Targets in line with this standard [add hyperlink: hgcapital.com/hg-joins-group-of-six-pioneering-firms-representing-e133bn-aum-to-combat-climate-change-by-setting-ambitious-science-based-targets-for-the-industry/]. As a member of the NZAMi [add hyperlink hgcapital.com/hg-joins-leading-private-equity-investors-commit-to-net-zero], Hg recognises the importance of setting short-term targets to limit warming to 1.5 degrees Celsius and the firm is targeting net zero across all portfolio companies within the next 30 years. 

For more information about Hg's commitment to climate change, please see Hg's TCFD report and annual carbon footprint report here: [https://hgcapital.com/responsibility/] 

As for HgCapital Trust, it has no carbon footprint to report as the Trust has no employees, fleet, premises or other emission sources. 

Diversity, Equity and Inclusion ('DEI')

Hg believes that having a diverse workforce deepens its talent pool and brings a wider range of perspectives. It manifests in how they navigate the business world, including investment decisions. Not only is it fundamentally the right thing to do, but Hg has also seen first-hand how diversity and inclusion ('D&I') create a virtuous cycle: the more diverse and inclusive a company is, the more each individual can add value. That translates to a greater impact for all stakeholders - investors, portfolio companies, employees and the communities in which we work and live. Hg is proud to have 48% female employees across the firm and 35% female executives. 

To encourage diversity and inclusion across Hg's portfolio, Hg's Portfolio DEI Council, a group of 10 portfolio companies representing different regions and sizes, co-developed a DEI toolkit which was launched in May 2022. The toolkit is a 100-page long guide, covering all aspects of diversity, equity and inclusion, which is split into four sections - DEI strategy, People, Culture and Communication. It has been shared across the Hg portfolio for all companies to leverage.

In 2020, Hg broadened its DEI focus externally by launching the Hg Foundation. Through the Hg Foundation, Hg takes action to remove barriers to education and skills in technology, encouraging a greater diversity of entrants into tech careers.

For more information and our latest DEI report please see hgcapital.com/diversity-and-inclusion/

ESG in the deal process

ESG is embedded into the entire deal process, from screening to exit. Hg is very clear, as outlined in their exclusion list, on the types of businesses in which they do not invest. During due diligence, Hg assesses companies for compliance with relevant laws about ESG, H&S, bribery and corruption. 

Once invested, all Hg's businesses are assessed against their Sustainable Business Framework as part of onboarding and annually thereafter. Hg's assessment is very comprehensive; covering over 170 metrics across key areas that are most relevant to tech businesses. It takes external frameworks, such as SASB, ILPA's diversity in action initiative and the ESG Data Convergence initiative into account.

However, Hg's ESG onboarding is not limited to the Sustainable Business Framework. In addition, they conduct separate assessments on cyber security, data privacy, carbon footprints and climate change risks. 

Each year Hg reviews and updates its ESG assessment to account for new topics, trends and regulations. In 2021, they included 20 additional questions to cover further aspects of data privacy, anti-competitive behaviour, diversity and inclusion and climate change. All portfolio companies are assigned a score from 0-10 and receive an action list to support improvement. Hg's ESG team provide support to help advance the business's ESG performance and each business is then reassessed on an annual basis.

 

 

Hg's Sustainable Business Framework

Hg's Sustainable Business Framework outlines key ESG focus areas for Software and Services companies. Please see https://hgcapital.com/responsibility/ for further details about the framework.

A signatory to the UNPRI since 2012.

A+A+ 2022 PRI assessment score:

'A+' for strategy and governance and

'A+' for private equity ownership

Hg is a founding member of the UK network of the Initiative Climate International (iCI)

Hg is one of the first PE firms globally to have committed to and had targets approved in line with the SBTi.

Hg is committed to report our ESG progress in line with several recognised external standards.

Winner of The Private Equity Award's Diversity and Inclusion Leader of the Year in 2021 and 2022

For more information and to watch our Responsible Investing video, please go to hgcapital.com/responsibility

 

The Hg Foundation

 

Removing barriers to education & skills in technology

The Hg Foundation has committed to nine partnerships since its launch in 2020, all with the aim of supporting the development of skills required for employment within the technology industry, focusing on individuals who may otherwise experience barriers to access.

The most recent partnership in July 2022 was a commitment of over $4 million to Cornerstone VC, a new seed-stage UK Technology VC firm, born out of black led angel group Cornerstone Partners.

At Hg we have learned that, time and time again, diversity leads to better investment and business decisions. This is why diversity in our own firm, across our portfolio and in the technology sector more generally continues to be one of the highest strategic priorities for Hg and is at the heart of The Hg Foundation's goals.

The Hg Foundation is funded by Hg through a proportion of carried interest from current and future Hg funds, a proportion of Hg's annual profits and also through charitable activities carried out across the firm. The Foundation acts independently of Hg and grant decisions are made by the Board of Trustees.

 

$12.5m

committed to date

9

partnerships

>8,000

students directly supported

 

For more information, please visit the Hg Foundation's website: www.thehgfoundation.com

Net asset value (NAV)

During the period, the NAV of HGT increased by £25 million, from £2.01 billion at 31 December 2021 to £2.03 billion at 30 June 2022.

Attribution analysis of movements in NAV

	Revenue £000	Capital £000	Total £000
Opening NAV as at 1 January 2022	35,114	1,970,610	2,005,724
Realised capital and income proceeds from investment portfolio in excess of 31 December 2021 book value	(32)	1,849	1,817
Net unrealised capital and income appreciation of investment portfolio	27,817	84,070	111,887
Net realised and unrealised gains from liquid resources	794	(22,964)	(22,170)
Share issue	-	12,324	12,324
Dividend paid	(22,764)	-	(22,764)
Expenditure	(4,306)	(746)	(5,052)
Taxation	-	-	-
Investment management costs:
Priority profit share - current year paid	(10,382)	-	(10,382)
Priority profit share - reallocation between capital and income	4,320	(4,320)	-
Carried interest - current year paid	-	-	-
Carried interest - current year provision	-	(40,942)	(40,942)
Closing NAV as at 30 June 2022	30,561	1,999,881	2,030,442

 

Analysis of NAV movements

Several underlying factors contributed to the increase in NAV. Positive impacts were the £111.9 million revaluation of the unquoted portfolio and uplifts of £1.8 million on the realisation of investments, compared with their carrying value at the start of the period. Shares issued during the period contributed a further £12.3 million.

Reductions in NAV included: the payment of £22.8 million of dividends to shareholders and a £40.9 million increase in the provision for future carried interest.

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.

Attribution analysis of movements in the value of investments

During the year, the value of the unrealised investments increased by £111.9 million, before the provision for carried interest. The majority of the increase, £280.5 million, relates to increases from profit growth in the underlying investments. A decrease in valuation multiples reduced the value of investments by £160.7 million.

Acquisitions net of realisations at carrying value of £43.5 million increased the value further and positive currency movements of £71.9 million increased the value of the unrealised portfolio. An increase in net debt of £83.0 million contributed negatively to the unrealised portfolio.

Top 20 portfolio trading performance as at 30 June 2022

With highly predictable and stable cash flows, the top 20 businesses (representing 79% by value of HGT's investments) have delivered strong sales growth of 31% (June 2021: 20%) and EBITDA growth of 26% (June 2021:27%) over the last 12 months ('LTM'), reflecting the defensive and resilient nature of the businesses in which HGT is invested. This represents reported aggregate sales of £7.7 billion and EBITDA of £2.4 billion over the last 12 months, equating to an EBITDA margin of 31%.

This is consistent with the high double-digit trading performance that the HGT portfolio has demonstrated over many years. Over the last five years, the EBITDA growth of the top 20 companies has been at an average of 25% LTM.

The business model characteristics of the companies in which we are invested give us confidence that this sustainable growth can be achieved consistently, going forward.

More than 95% by value of the top 20 businesses within the portfolio achieved double-digit revenue growth, and more than 75% have delivered double-digit EBITDA growth over the last 12 months.

We have seen very robust and consistent trading performance from the majority of the portfolio, with particularly strong growth from Intelerad, Litera, The Access Group, Howden, Septeo, Sovos and FE fundinfo.

Where a company does not perform as well, it is reflected in its valuation.

For further information on how individual companies have performed over 2022, please refer to the realised and unrealised valuations table on page 33 of the full Interim Report and Accounts.

Valuation and net debt analysis as at 30 June 2022

Our valuation policy is applied consistently, in accordance with the IPEV Valuation Guidelines. Each company has been valued based on the trading multiples of comparable businesses and recent M&A activity; the average EBITDA multiple for the top 20 investments is 27.1x (27.4x at 31 December 2021).

The basis of this approach is to apply a relevant multiple to a suitable earnings-based performance metric. We take a considered approach in determining the level of maintainable earnings in each valuation: an earnings-based valuation being most appropriate. Where a company has negative or significantly depressed earnings, a revenue-based valuation can be used. Most holdings have been valued using LTM earnings, or available information at the reporting date. The earnings figure used may be adjusted on a pro-forma basis reflecting acquisitions, disposals or other adjustments to the extent a buyer would make these.

The multiple is derived by reference to market-based multiples. This will be a weighted combination of a quoted and M&A comparable basket and the multiple at which the company transacted. These weightings can be adjusted as necessary to address risk and broader economic challenges. When constructing the basket, we look to identify companies that are similar, in terms of risk and growth attributes, to the company being valued. This is more likely to be the case where the companies are similar in terms of business activities, market and geography.

We then cross-check the existing valuation against a range of other valuation techniques, and also use back testing to understand substantive differences that may legitimately occur between an exit price and the previous fair value assessment, to inform our valuation policy.

Our companies make appropriate use of gearing, with a weighted average net debt to EBITDA ratio for the top 20 of 7.5x LTM (7.1x at 31 December 2021). Many of our businesses have highly predictable revenues, strong earnings growth and are very cash generative, enabling us to use debt to reduce their cost of capital and improve returns.

 

Outstanding commitments of HGT

At 30 June 2022, HGT held liquid resources of £435 million and had outstanding commitments of £1,550 million, as listed below. We anticipate the majority of these outstanding commitments will be drawn down over the next three to four years (2022-26) and are likely to be partly financed by cash flows from future realisations. Additionally, to mitigate the risk of being unable to fund any draw-down under its commitments to invest alongside Hg's funds, the Board has negotiated a right to opt out, without penalty, of HGT's obligation to fund such commitments, where it does not have the funds to do so or certain other conditions exist. HGT also has access to a £250 million bank facility which was 54% drawn as at 30 June 2022.

Fund	Fund vintage	Original commitment £million	1	Outstanding commitments as at 30 June 2022		Outstanding commitments as at 31 December 2021
				£million	% of NAV	£million	% of NAV
S3	2022	885.1	2	883.4	43.5	627.5	31.3
G10	2022	344.3	3	344.3	17.0	-	-
HGT	Various	102.9	4	102.9	5.1	92.3	4.6
S2	2020	329.4	5	63.6	3.1	67.8	3.4
G9	2020	309.9	6	50.6	2.5	66.2	3.3
G8	2018	350.0		48.9	2.4	51.5	2.6
M3	2020	99.0	7	35.3	1.7	64.0	3.2
S1	2018	150.0		15.1	0.7	15.9	0.8
M1	2011	60.0		3.3	0.2	3.3	0.2
M2	2017	80.0		1.6	0.1	1.8	0.1
G7	2013	200.0		0.8	-	1.0	-
Asper RPP I	2006	18.6	8	0.6	-	0.6	-
Total				1,550.4	76.3	991.9	49.5
Liquid resources				435.4	21.4	371.5	18.5
Net outstanding commitments unfunded by liquid resources				1,115.0	54.9	620.4	31.0

 

¹ Excluding any co-investment participations made through HGT LP.

² Sterling equivalent of $1.1 billion.

³ Sterling equivalent of €400 million.

⁴ Sterling equivalent of $125 million of junior debt.

⁵ Sterling equivalent of $400 million.

⁶ Sterling equivalent of €360 million.

⁷ Sterling equivalent of €115 million.

⁸ Sterling equivalent of €21.6 million.

 

 

 

Investment portfolio of HGT

Fund limited partnerships	Residual  cost £000	Total valuation1 £000	Portfolio value %
Primary buyout funds:
HGT 8 LP	252,956	871,182	42.4
HGT 8 LP - Provision for carried interest	-	(125,342)	(6.1)
HGT Saturn 2 LP	223,889	333,373	16.3
HGT Saturn 2 LP - Provision for carried interest	-	(18,752)	(0.9)
HGT Genesis 9 LP	250,726	290,640	14.2
HGT Genesis 9 LP - Provision for carried interest	-	(5,760)	(0.3)
HGT Saturn LP	136,361	260,053	12.7
HGT Saturn LP - Provision for carried interest	-	(18,088)	(0.9)
HGT LP	142,324	189,469	9.2
HGT Mercury 2 LP	57,688	159,579	7.8
HGT Mercury 2 LP - Provision for carried interest	-	(25,776)	(1.3)
HGT 7 LP	24,226	83,752	4.1
HGT 7 LP - Provision for carried interest	-	(16,754)	(0.8)
HGT Mercury 3 LP	58,576	65,415	3.2
HgCapital Mercury D LP	2,316	10,153	0.5
HgCapital Mercury D LP - Provision for carried interest	-	(2,049)	(0.1)
Total buyout funds	1,149,062	2,051,095	100.0
Renewable energy funds:
Asper RPP I	5,039	367	-
Total investments net of carried interest provision	1,154,101	2,051,462	100.0

 

¹Includes accrued income of £128,585,000 and the carried interest provision as referenced but before the deduction of the fund level facility of £325,311,000.

 

Hg cluster by value

29%  ERP & Payroll

28%  Tax & Accounting

10%  Healthcare IT

8%    Legal & Regulatory Compliance

7%    SME Technology Services

7%    Capital Markets & Wealth Management IT

6%    Insurance

5%    Automation & Engineering

 

Investment vintage by value

2%    2022

26%  2021

28%  2020

7%    2019

37%  pre-2019

 

Geographic spread by value

39%  UK

24%  North America

17%  Germany

13%  Scandinavia

7%    Other Europe

 

Investments and realisations

Investments

Over the course of the period, Hg invested a total of £826 million on behalf of its clients, with HGT's share being £71 million. HGT has made significant new and further investments post 30 June.

The vast majority of our investments are generated by establishing and developing relationships with companies over the longer term and typically pursuing opportunities where we have a strong relationship with a founder or management team. By doing this, we believe that we can invest in the very best businesses within our chosen clusters.

We continue to look for businesses which share similar underlying business model characteristics, such as: high levels of recurring revenues; a product or service which is business critical, but typically low spend; low customer concentration and low sensitivity to market cycles. This is a theme which runs through many of our new investments - and we believe that companies with these characteristics will remain in high demand across market cycles.

 

 

New investments in the six months to 30 June 2022

LucaNet

£15.6m invested on behalf of HGT

In June, Hg completed an investment in LucaNet AG ('LucaNet'), a leading German headquartered financial consolidation and planning software business. Founded in 1999, LucaNet began with a vision to create a one-stop-shop software solution, bringing together financial control, planning and consolidation. Since then, the company has evolved into a leader in its core segment, the Office of the CFO for mid-sized companies. With a loyal customer base of more than 3,500 organizations in over 50 countries, offices in China, Singapore and the Americas as well as a strong European base, LucaNet employs around 500 people worldwide.

Pirum

£13.9m invested on behalf of HGT, including £4.5m in co-investment

In June, Hg completed an investment in Pirum Systems, a leading provider of post-trade automation and collateral management technology for the global securities finance industry. Pirum's software provides a secure processing hub which seamlessly links industry participants, allowing them to process and verify key transaction details electronically. This delivers significant trade and collateral efficiency, lowers costs and enhances regulatory compliance for its network of clients. Pirum's products assist 90 of the most prestigious global financial institutions to process over $3 trillion of transactions daily.

Fonds Finanz

£7.9m invested on behalf of HGT

In February, Hg completed an investment in Fonds Finanz, a leading tech-enabled financial intermediary pool in the German insurance sector. Founded in 1996 and headquartered in Munich, Fonds Finanz serves more than 28,000 customers including brokers, distributors, insureTechs and banks across Germany. With a comprehensive software, advisory and service offering, Fonds Finanz gives customers access to a full-service platform, comprising products from more than 500 insurance and financial product vendors in Life, Health, Property & Casualty and Investment funds.

 

Further investments in the six months to 30 June 2022

Howden

£21.4m invested on behalf of HGT, including £11.6m in co-investment

Over the first half of the year, Hg made a further investment in Howden Group Holdings ('Howden').

Hg announced its original investment in Howden, a leading international insurance group (previously known as Hyperion Insurance Group Limited), in 2020.

Lyniate

£12.1m invested on behalf of HGT, including £4.0m in co-investment

In January, Hg completed an additional investment into Lyniate, a leader in healthcare data interoperability. Over 1,300 healthcare organisations around the globe rely on Lyniate interoperability solutions to connect people through increased access to data.

GGW

£2.1m invested on behalf of HGT

In January, due to the continued strong opportunity to acquire high quality and accretive brokers, Hg completed a further investment in GGW, a leading Property & Casualty focused insurance broker principally serving SMEs in the DACH region, to fund recent larger M&A.

 

New investments since the period end

IFS Workwave

£148.2m invested on behalf of HGT, including £12.6m in co-investment

In July, Hg completed a significant minority investment, alongside EQT and TA Associates, in IFS and WorkWave, valuing the company at $10bn. IFS is a leading software vendor for organisations who want to differentiate on service. With thousands of the world's most respected brands as customers, IFS is a recognised provider across multiple sectors including Service Management (both Field Service Management and Enterprise Service Management), Enterprise Asset Management (EAM) and Enterprise Resource Planning (ERP). WorkWave's suite of products empower service-oriented companies in its target verticals to reach their full potential through scalable, cloud-based software solutions that support every stage of a business life cycle, including marketing, sales, service delivery, customer interaction and financial transactions.

Ideagen

£71.5m invested on behalf of HGT

In June, Ideagen, a leader in compliance software for regulated industries, delisted from the London Stock Exchange's Alternative Investment Market, following a positive shareholder meeting, which showed support for Hg's offer for the business.

Established in 1993 and headquartered in Nottingham, UK, Ideagen's software helps companies comply with regulation and manage risk. It is a leader in the regulatory and compliance software sector, serving highly regulated industries such as life sciences, healthcare, banking and finance and insurance.

Waystone

Estimated £32.0m invested on behalf of HGT

In January, Hg announced an investment in Waystone Group, a leading provider of institutional governance, risk and compliance services to the asset management industry. This investment is via the Hg Saturn 2 fund, alongside Montagu, a leading private equity firm; Hg will join as a strategic investor and joint shareholder. Montagu first announced its investment in Waystone in July 2021. Hg's investment is subject to regulatory approval and customary closing conditions.

 

Further investments since the period end

The Access Group

Estimated £176.6m invested on behalf of HGT

In June, Hg announced a further investment in The Access Group ('Access'), a leading provider of business management solutions to mid-market organisations in the UK, Ireland and Asia Pacific via the Hg Saturn Fund.

This further strategic investment from Hg, and TA Associates, a leading global growth private equity firm, is significant. In addition, GIC, a global institutional investor, has confirmed a new investment to become a minority shareholder in the company.

Team.blue

Estimated £32.4m invested on behalf of HGT

In July, Hg announced a further investment in team.blue, a leading digital enabler for companies and entrepreneurs across Europe. This investment will help to supercharge the business and enable team.blue to implement ambitious plans for further expansion in its product offering of online solutions, as well as increase its local presence across more countries in Europe.

Norstella

Estimated £4.7m invested on behalf of HGT

In June, Hg, via the Hg Genesis 9 Fund announced an investment in Citeline (formerly Pharma Intelligence) - a leading provider of specialist intelligence, data and software for clinical trials, drug development and regulatory compliance - which has announced an agreement to merge with Norstella, an organisation that helps life sciences companies navigate the complexities of the drug life cycle.

 

Realisations

Over the course of the period, Hg has returned a total of £260 million to its clients, including £30 million to HGT.

Hg has seen some significant exits post June at an average c.29% uplift to their December carrying value and we will continue to assess further opportunities to return cash proceeds to our clients, including HGT.

 

Refinancings in the six months to 30 June 2022

Lyniate

£19.8m returned to HGT

In January, Hg completed a refinancing of Lyniate, a global leader in healthcare data interoperability and data liquidity solutions. Over 1,300 healthcare organisations around the globe rely on Lyniate interoperability solutions to connect people through increased access to data. Hg retains a majority stake in Lyniate.

Argus Media

£8.6m returned to HGT

In June, the Hg Saturn team completed the refinancing of Argus Media, a provider of independent price assessments, essential data and analysis of the international energy and commodity sectors. With over 160 publications and 26,000 price assessments, Argus is one of the two largest price reporting agencies globally.

 

Full exits since the period end

Medifox

Estimated £47.0m returned to HGT

In June, Hg announced that it had agreed the sale of MEDIFOX DAN, a leading provider of digital solutions for the German care and therapy sectors, to ResMed, a global leader in cloud-connected medical devices and out-of-hospital software-as-a-service (SaaS) business solutions, in a transaction valuing the business at an enterprise value of around $1 billion.

This transaction represents an uplift of £15.0 million (47%) over HGT's carrying value at 31 December 2021.

Itm8

Estimated £32.7m returned to HGT

In May Hg announced that it had agreed the sale of itm8, a leading supplier of IT services for private businesses and the public sector in Europe to Axcel, a Nordic private equity fund.

This transaction represents an uplift of £2.6 million (9%) over HGT's carrying value at 31 December 2021.

 

Partial exits since the period end

Intelerad

£27.5m returned to HGT

In August, Hg completed a partial sale of Intelerad, a leading global provider of enterprise medical imaging solutions, to TA Associates ('TA'), a leading global growth private equity firm. TA joins Hg and ST6 in supporting Intelerad to accelerate growth.

This transaction represents an estimated uplift of £17.8 million (26%) over HGT's carrying value at 31 December 2021.

Team.blue

Estimated £16.0m returned to HGT

In July, Hg announced the partial sale of team.blue, a leading digital enabler for companies and entrepreneurs across Europe.

This transaction valued HGT's existing investments in the business at £51.3 million representing an uplift of £11.1 million (28%) over the carrying value at 31 December 2021.

 

Refinancings since the period end

The Access Group

Estimated £232.2m returned to HGT

In June, Hg announced the recapitalisation of The Access Group ('Access'), a leading provider of business management solutions to mid-market organisations in the UK, Ireland and Asia Pacific.

This transaction valued Access at 42% over the carrying value at 31 December 2021.

To view our press releases, please visit www.hgcapitaltrust.com/news-insights/press-releases/year/2022

 

Summary of investment and realisation activity

 

Investments made during the period

Company	Cluster	Location	Cost £000
LucaNet	Tax & Accounting	Germany	15,649
Pirum	Capital Markets & Wealth Management IT	UK	13,928
Fonds Finanz	Insurance	Germany	7,864
New investments			37,441
Howden	Insurance	UK	21,374
Lyniate	Healthcare IT	North America	12,068
GGW	Insurance	Germany	2,136
Other2			(1,892)
Follow-on investments			33,686
Total investments on behalf of HGT			71,127

 

 

 

Realisations made during the period

Company	Cluster	Exit route	Proceeds1 £000
Lyniate	Healthcare IT	Refinancing	19,796
Argus Media	Capital Markets & Wealth Management IT	Refinancing	8,636
Other2			1,005
Partial realisations			29,437
Total proceeds from realisations			29,437
Carried interest paid to the Manager			-
Total proceeds from realisations received by HGT			29,437

 

¹Includes gross revenue received of £1.4 million during the period ended 30 June 2022.

²Other investments and realisations includes immaterial transactions in relation to the remaining portfolio.

 

Hg's outlook

 

"Increasingly, we see this environment as one of opportunity, as short-term valuations create space for greater long-term performance."

David Toms, Director of Research, Hg

 

Market Update / Outlook

We remain of the view that market concerns about inflation will have muted long-term impacts on our businesses. However, we are also aware that events rarely align perfectly along a timeline, and there is a risk that a combination of geo-political challenges, fiscal tightening, supply chain constraints, and cost increases, cause broad economic challenges to which our portfolio's end customers may respond with temporarily lower investment (postponing investments in systems and software) before the structural factors that drive the need for software reassert themselves. To claim immunity from any potential macro downturn or recession would be naïve, and we are alert to the risks of near-term volatility in the general economic backdrop, as well as to the structural opportunities this could create for an investor like Hg with long-term horizons.

Q2 in the public markets saw a faster rate of valuation and price decline than Q1, as investors continued to reprice equities in light of higher interest rates, geo-political instability and a growing expectation of recession. A 'typical' downturn (if there really is such a thing) tends to lead with multiple contraction, followed by earnings contraction, and an eventual recovery catalysed either, in recent downturns, by central bank stimulus, or historically, earnings recovery. Assuming that inflation leaves central bankers with fewer options than the GFC and COVID downturns, earnings momentum could be the most important indicator over the next 12-24 months.

As we move into Q2 reporting season, we are starting to see a slightly mixed picture emerging from software and services majors. Some have sounded a moderately more cautious note whereas others have reiterated a robust underlying outlook for the next 3-6 months. This variability does not surprise us; in the main, macro changes are outweighing underlying trading, particularly in the US where overseas earnings are impacted by the near-unprecedented strength of the US Dollar. In addition, cyclical pressures are growing, but not evenly - for example, whilst there is clear evidence of lengthening sales cycles, this is currently focused on larger deals at the 'enterprise' end of the market. However, what is also clear to us is that the structural drivers of our sector are intact and, if anything, enhanced by the macro-economic shifts we see, as companies invest in technology in order to help offset cost inflation.

Note; Based on R3K listed US software & Services sector, c.400 companies in total dataset. Unprofitable = EV:EBITDA >50 or negative.

Source: Factset, Hg analysis

Valuation environment

Despite the positive structural drivers for the sector, public market investors remain focused on current macro concerns. A striking pattern, consistent with the theme of macro-driven sentiment shifts, can be seen in public market valuation movements over the past 12 months. In the second half of 2021, 'unprofitable software' was impacted hard. Moving into the first quarter of 2022, this spread to 'profitable software', and in Q2-22, the impact spread across most other sectors of public markets.

The pendulum of public market valuations has swung from the SPAC-fuelled euphoria of 2021 to a more downbeat perspective in 2022, (the archetypal illustration of Ben Graham's manic-depressive 'Mr Market'). The same lack of selectivity that occurred on the way up in 2020 and 2021, is now impacting in the opposite direction.

We see this valuation environment as one of emerging opportunity as the dust settles. Our existing platform businesses, particularly those with significant M&A machines (Access and Visma being the most impressive examples), should be able to capitalise on more attractive prices and thus potential returns. Entry points for new platforms should be lower, and possibly most importantly, there will be opportunities to invest in high-quality businesses that are otherwise inaccessible. We have already seen this with recent investments into businesses that we have been tracking for years, but only now have become amenable to partner with us.

Although our valuation process is based partly on public comparators, as with our companies, the vast majority of these are profitable, established businesses. As we have shown, such businesses have shown much more limited valuation volatility than the high growth, low/no profit businesses that headline more often in the media.

Consistent with our previous commentary, in any quarter, there are two main factors influencing our valuations: earnings multiple change in public comparators, and growth in actual earnings. Our companies typically grow their EBITDA by c.10-15% organically each year, i.e. c.3% each quarter, and approximately double this on an 'all in' basis including M&A. In addition, our valuations are also affected by changes in private markets comparators, which have a smoothing effect against public market equivalents.

The latter two factors have meant that our funds have been less exposed to public market volatility during challenging periods, as well as providing some protection against broader de-rating in the long term. The relative pace of movements (public rating changes can be relatively rapid; earnings growth and private comparators tend to be much steadier) dictates movements in any one quarter, but over the long term, earnings growth tends to dominate.

Activity levels

Over the first half of 2022, Hg has invested more than £826 million, primarily into 6 new and further investments, including
£71 million on behalf of HGT. Following the period end Hg deployed a further £3.2 billion into new and existing companies, including £252 million from HGT. All these investments sit firmly within Hg's 'sweet-spot' in software and service businesses across eight industry verticals or 'clusters'. This investment continues to cement Hg's role as one of the largest software groups in the world, whether measured as an investor, or as an industry participant.

We have commented previously that in any 12-month period, the investment teams across Hg aim to make between 8 and 16 new platform investments in total across the active Hg Saturn, Hg Genesis and Hg Mercury funds, and that we also generally seek to deliver similar numbers of liquidity events (sales or partial sales of portfolio companies and refinancings) each year. We believe the pace of investment should continue at broadly this level over the medium term. However, while we continue to see many compelling opportunities, we may well see a period of reduced activity through to the end of this financial year as seller expectations adjust and react to the macro-outlook.

From these investments, there is a further cascade of M&A opportunities, adding to the breadth and depth of our organic development and catalysing cross sales to existing and acquired customers. On average, our portfolio companies may acquire two to three businesses a year, meaning across a portfolio of more than 46 B2B software and services companies we would typically expect to make more than 100 M&A investments each year (and to diligence and reject many more). To give a further sense of this scale, Hg's combined portfolio enterprise value has risen from c. $100 billion in December 2021 to over $115 billion at 30 June 2022.

 

"...we are alert to the risks of near-term volatility in the general economic backdrop, as well as to the structural opportunities this could create for an investor like Hg with long-term horizons."

 

 

 

https://www.hgcapitaltrust.com/news-insights/video-library?vid=1539

https://hgcapital.com/insight/bitesize-tech-sector-insight-from-david-toms/

 

Overview of the underlying investments

held through HGT's limited partnerships

Investments (in order of value)		Fund	Sector	Location	Vintage	Residual cost £000	Total valuation1 £000	Portfolio value %	Cum. Value %
1	Access	G8/HGT	ERP & Payroll	UK	2018	60,653	428,794	19.0	19.0
2	Visma	G7/S1/S2/HGT	Tax & Accounting/ERP & Payroll	Scandinavia	2020	90,332	221,903	9.8	28.8
3	Howden	S2/HGT	Insurance	UK	2021	63,401	101,809	4.5	33.3
4	Litera	G8/G9	Legal & Regulatory Compliance	N.America	2019	28,999	99,319	4.4	37.7
5	Transporeon	G8/HGT	ERP & Payroll	Germany	2019	41,993	87,370	3.9	41.6
6	Intelerad	G8	Healthcare IT	N.America	2020	32,885	87,136	3.8	45.4
7	IRIS	S1	Tax & Accounting/ERP & Payroll	UK	2018	36,380	83,082	3.7	49.1
8	P&I	G7/S1/HGT	ERP & Payroll	Germany	2020	36,347	80,612	3.6	52.7
9	Sovos	S2/HGT	Tax & Accounting	N.America	2020	54,455	72,923	3.2	55.9
10	MeinAuto	G8	Automation & Engineering	Germany	2017	33,967	63,626	2.8	58.7
11	insightsoftware	S2/HGT	Tax & Accounting	N.America	2021	55,071	63,227	2.8	61.5
12	Septeo	G9	Legal & Regulatory Compliance	France	2020	38,545	61,814	2.7	64.2
13	team.blue	G8/M2	SME Technology Services	Benelux	2019	16,530	51,069	2.3	66.5
14	Medifox	M2/HGT	Healthcare IT	Germany	2018	11,659	47,027	2.1	68.6
15	FE fundinfo	M2/G9	Capital Mkts & Wealth Mgmt IT	UK	2021	22,090	44,166	2.0	70.6
16	Norstella	M2/G9/HGT	Healthcare IT	UK	2021	24,595	42,311	1.9	72.5
17	Argus Media	S1/HGT	Capital Mkts & Wealth Mgmt IT	UK	2020	31,725	39,389	1.7	74.2
18	Azets	G7/HGT	Tax & Accounting	UK	2016	20,966	39,285	1.7	75.9
19	Lyniate	M2/M3/HGT	Healthcare IT	N.America	2018	17,866	35,536	1.6	77.5
20	Caseware	G8	Tax & Accounting	N.America	2020	28,612	34,908	1.5	79.0
21	Benevity	S2/HGT	ERP & Payroll	N.America	2021	32,079	33,323	1.5	80.5
22	itm8	G8	SME Technology Services	Scandinavia	2018	16,069	32,709	1.4	81.9
23	Trackunit	G9	Automation & Engineering	Scandinavia	2021	26,593	32,159	1.4	83.3
24	Citation	G8	SME Technology Services	UK	2020	21,998	31,726	1.4	84.7
25	GGW	M2/M3	Insurance	Germany	2020	11,280	26,766	1.2	85.9
26	Gen II	G9	Capital Mkts & Wealth Mgmt IT	N.America	2020	19,921	25,830	1.1	87.0
27	Prophix	G9	Tax & Accounting	N.America	2021	17,139	24,640	1.1	88.1
28	HHA	G9	Healthcare IT	N.America	2021	24,035	22,390	1.0	89.1
29	Revalize	G9	ERP & Payroll	N.America	2021	18,686	20,933	0.9	90.0
30	TeamSystem	G8	Tax & Accounting/ERP & Payroll	Italy	2021	14,250	19,695	0.9	90.9
31	Riskalyze	M3/HGT	Capital Mkts & Wealth Mgmt IT	N.America	2021	15,868	19,214	0.8	91.7
32	DEXT	S1/HGT	Tax & Accounting	UK	2021	15,620	18,417	0.8	92.5
33	Project CH	S2	Tax & Accounting	Germany	2021	18,647	18,163	0.8	93.3
34	Commify	M1/HGT	SME Technology Services	UK	2017	4,080	18,029	0.8	94.1
35	Serrala	G9	Tax & Accounting	Germany	2021	23,086	16,235	0.7	94.8
36	LucaNet	G9	Tax & Accounting	Germany	2022	15,649	16,228	0.7	95.5
37	smartTrade	M2/HGT	Capital Mkts & Wealth Mgmt IT	France	2020	18,821	14,782	0.7	96.2
38	Silverfin	M2/HGT	Tax & Accounting	Benelux	2019	11,387	13,961	0.6	96.8
39	Pirum	M3/HGT	Capital Mkts & Wealth Mgmt IT	UK	2022	13,928	13,575	0.6	97.4
40	F24	M2/HGT	SME Technology Services	Germany	2020	10,458	12,370	0.5	97.9
41	Geomatikk	M2/HGT	SME Technology Services	Scandinavia	2021	11,392	10,894	0.5	98.4
42	Auvesy	M3	Automation & Engineering	Germany	2021	8,204	10,461	0.5	98.9
43	Mitratech	G7/HGT	Legal & Regulatory Compliance	N.America	2017	3,328	9,375	0.4	99.3
44	Fonds Finanz	M3	Insurance	Germany	2022	7,864	7,634	0.3	99.6
45	Bright	M3	ERP & Payroll	Ireland	2021	6,529	7,532	0.3	99.9
46	ProcessMAP	M3	Legal & Regulatory Compliance	N.America	2021	5,249	5,515	0.2	100.1
	Non-active investments (2)					9,833	-	-	100.1
	Total buyout investments (48)					1,149,064	2,267,862	100.1
	Currency hedges	Various	Forward sale of US$ and €			-	(4,246)	(0.1)	100.0
	Renewable energy	Asper I	Renewable energy			5,040	367	-	100.0
	Total all investments					1,154,104	2,263,983	100.0

 

¹Including accrued income of £128,585,000, but before a deduction for the provision for carried interest of £212,521,000 and fund level facility of £325,311,000. Note that the investments held at fair within the Balance Sheet on page 62 of the full Interim Report and Accounts or below exclude accrued income but include the deduction for carried interest and the fund level facilities.

 

Top 10 investments

representing 59% of the value of HGT's investments

 

Investments are held through limited partnerships, of which HGT is the sole limited partner. HGT invests alongside other clients of Hg. Typically, HGT's holding forms part of a much larger majority interest held by Hg's clients in buyout investments in companies with an enterprise value ('EV') of between £100 million and over £10 billion.

Hg's review generally refers to each transaction in its entirety, apart from the tables detailing HGT's participation or where it specifically says otherwise.

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.

 

 

The Access Group

a leading provider of fully integrated business-management software to UK mid-market organisations

 

01	Investment date	Location	Cluster	Website
	June 2018	UK	ERP & Payroll	theaccessgroup.com

 

HGT's investment through G8 and HGT LP
Hg clients' total equity:	51.3%
Unrealised value (£000):	428,794
% of NAV:	21.1%