HGCapital Trust plc

Legal Entity Identifier: 213800J7QUJJBEFSIN38

ANNUAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2022

AND NOTICE OF ANNUAL GENERAL MEETING

HgCapital Trust plc

ANNUAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2022

Resilient NAV performance in a challenging macro environment

London, 13 March 2023:  HgCapital Trust plc ('HGT'), today announces its annual results for the year ended 31 December 2022. 

HGT provides investors with a listed vehicle to invest in unquoted businesses managed by Hg, Europe's largest investor in software & technology-enabled services businesses.

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

Highlights over 2022 include:

An investment of £1,000 made 20 years ago in HGT would now be worth £26,777, a total return of 2,578%. An equivalent investment in the FTSE All-Share Index would be worth £4,361.[1]

Jim Strang, Chairman of HGT, commented:

"The HGT portfolio is made up of 48 individual companies, spread across eight end-market 'clusters' which are well known to Hg. These investments operate across the B2B software and technology-enabled business services sectors. As part of the long-standing investment strategy adopted by Hg, these companies typically benefit from sector leading market positions and have highly resilient and defensive business models with loyal customers and high rates of recurring revenues. The portfolio has continued to deliver strong operating performance in the last year, despite the many and obvious challenges presented in the broader global economy. Looking forward, the environment seems set to remain challenging, however the investment model adopted by HGT and the strength of the portfolio augurs well for its continued successful development."

David Toms, Head of Research at Hg, commented:

"Increasingly, we see this environment as one of opportunity, as valuation adjustments create the

opportunity to acquire businesses with attractive long-term performance."

SUMMARY performance

Source: Hg, Factset. All references to total return allow for all historic dividends being reinvested
Note: Hg undertakes full revaluations of the portfolio on a quarterly basis, the next process being 31 March 2023, therefore the movement in unrealised value of the portfolio to the end of February 2023 is attributable to FX only.

Performance overview

Net assets of £2.1 billion, with continued long-term outperformance of the FTSE All-Share over one, three, five, ten and twenty-year periods:

Strong double-digit growth from the realised and unrealised portfolio:

Continued investment and commitments to drive future value:

Credit facility, new equity issuance and share buybacks:

POST PERIOD EVENTS

Outlook

Commentary from Hg (the Manager):

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

- Ends -

The Company's 2022 Annual Report and an animated presentation from Hg to accompany the results are available to view at:  http://www.hgcapitaltrust.com/.

For further details:

About HgCapital Trust plc

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

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

HgCapital Trust plc

Annual Report and Accounts and Notice of Annual General Meeting

HgCapital Trust plc (the "Company" or "HGT") announces its annual results for the year ended 31 December 2022 and the publication of its annual report and accounts for the same period, which includes the notice of Annual General Meeting.

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.

FINANCIAL AND PERFORMANCE HIGHLIGHTS 

2022 performance at a glance

£2.1bn

Net assets

31 December 2021: £2.0bn

+5.4%

NAV per share (456.6p)

31 December 2021: +43.9%

£1.6bn

Market capitalisation

31 December 2021: £1.9bn

-15.1%

Share price (350.5p)

31 December 2021: +39.8%

7.0p

Full year dividend

31 December 2021: 7.0p

1.7%

Total ongoing charges

31 December 2021: 1.4%

£527m

Cash invested on behalf of HGT

31 December 2021: £424m

£404m

Cash returned to HGT

31 December 2021: £271m

£476m

Available liquid resources

(23% of NAV)

31 December 2021: £470m

£1.2bn

Outstanding commitments
(57% of NAV)

31 December 2021: £992m

Note NAV per share and share price return on a total return basis assuming all historical dividends have been re-invested, which is an Alternative Performance Measure ('APM').

Top 20 investments (77% of portfolio value)

A snapshot as at 31 December 2022

£9.5bn

LTM revenues

31 December 2021: £6.3bn

£2.8bn

LTM EBITDA

31 December 2021: £2.2bn

29%

EBITDA margin

31 December 2021: 35%

+30%

LTM sales growth

31 December 2021: +27%

+25%

LTM EBITDA growth

31 December 2021: +30%

27.2x

EV to EBITDA multiple

31 December 2021: 27.4x

8.0x

Top 20 net debt to EBITDA ratio

31 December 2021: 7.1x

CHAIRMAN'S STATEMENT

The HGT portfolio is made up of 48 individual companies, spread across eight end-market 'clusters' which are well known to Hg. These investments operate across the B2B software and technology-enabled business services sectors. As part of the long-standing investment strategy adopted by Hg, these companies typically benefit from sector leading market positions and have highly resilient and defensive business models with loyal customers and high rates of recurring revenues.

Jim Strang, Chairman, HgCapital Trust plc

Dear Shareholder,

Last year was another year of considerable challenge and volatility both economically and geo-politically. For the first time in a number of years, rates of inflation increased dramatically on a global basis while central banks materially increased interest rates. In addition, the tragic and ongoing conflict in the Ukraine acted to exacerbate inflationary pressures, not to mention increasing levels of geo-political risk to a point not seen for a generation. Against this challenging backdrop, the HGT portfolio performed well for shareholders, although this was not reflected in the share price:

Highlights in 2022 included:

• 5.4% NAV per share growth on a total return basis, with net assets of £2.1 billion;

• £527 million of new and further investments by HGT, primarily into seven new businesses across the core investment clusters targeted by Hg;

• £630 million newly committed to invest alongside new Hg funds over the next three to four years;

• £404 million of £404 million of proceeds returned to HGT, with three full realisations at an average uplift to book value of 28%.

Performance

The NAV of HGT increased by 5.4% over the year, reflecting the ongoing strength of the operating performance of the HGT portfolio, offset by a reduction in the valuation multiple ascribed to high-growth software assets globally. While the portfolio continued to develop very much in line with progress seen in recent years, HGT's share price declined by 15.1%.

The events of the year saw a marked change in the private equity deal making environment, notably in the second half of the year, as new investment and divestment activity significantly reduced. Despite the challenging market conditions, the strength and focus of the Hg investment model allowed significant progress to be made across the portfolio over the year. Seven new platform investments were made in 2022 with HGT's share of these deals representing a total of £527 million of capital invested. These new investments all comply with the proven Hg investment strategy which targets software and technology-enabled business services in eight specific sub-sectors or 'clusters'. As I have noted in previous reports, the Hg model is based around supporting the portfolio companies to achieve their full potential and in creating larger and more valuable businesses as a result which are much sought after in the markets they operate in. Consequently, despite the challenging market conditions, Hg was able to deliver a number of realisation events over the course of the year, returning £404 million to HGT in cash. Three full exits in the year were delivered at an average exit multiple of 3.9x cost and achieved at an average uplift of 28% to their December 2021 valuations. These exits returned considerable cash to HGT. Valuations are an area of continued focus for the Audit Valuation and Risk Committee.

At the end of the year, the HGT portfolio consisted of 48 investments, all of which conform to the Hg sector and investment strategy and in aggregate these assets have continued to perform very well. The top 20 portfolio companies (77% of the portfolio by value) generated revenue growth of 30% over the year, while associated EBITDA grew by 25%. Across the entire portfolio, three businesses were held below their investment cost at the end of the year, representing 2% of the aggregate portfolio value.

Fundraising

Hg's success in building and creating value in the portfolio supported a new round of fundraising in the year, in which HGT participated, to support HGT's long-term NAV growth ambitions. Hg successfully raised significant capital for the Hg Saturn and Hg Genesis fund families in the year and as further funds are raised over the first half of 2023, HGT will continue to participate as Hg's largest single investor. HGT's commitments to the new Hg funds ensure that HGT maintains access to Hg's deal flow, including co-investment opportunities, in what is anticipated to be an attractive environment for new investments. HGT continues to benefit from a unique opt out clause within its underlying investment agreements with Hg, which provides a useful risk management tool for the Board in managing and optimising the HGT balance sheet.

Balance sheet

In order to grow the NAV of our portfolio and deliver returns for shareholders, HGT operates in a continual cycle of commitment, investment and realisation of the underlying investments. This process involves continual monitoring and revision of forecasts and estimates, as they relate to the portfolio and an optimisation of the HGT balance sheet to fund these strategies.

Looking forward, as the environment seems set to remain challenging, we have looked to pull on specific levers to optimally balance future portfolio investment, cash flow management and uncertainties.

Increase in credit facility

As part of this process, HGT uses a revolving credit facility to support the investment programme and to improve balance sheet efficiency. In 2022, HGT increased its facility to c. £290 million and has recently secured approval with lenders for a further increase to £350 million. The upsizing of the facility will aid in the cashflow management of HGT in what seems likely to be a more uncertain deal environment and, while the total quantum of the facility is notably larger than shareholders will recall from prior years, it is very much in line with the relative sizing of the debt facility to the HGT overall balance sheet witnessed in the past.

Share issuance and buybacks 

In addition to the credit facility, HGT seeks to take advantage of opportunities to issue new shares to support the investment strategy at times when doing so would be accretive to shareholders. During 2022, HGT issued £12 million worth of new shares at a small premium to the prevailing NAV and in the third quarter of the year, the Board executed a small share buyback programme (utilising £1.4 million of cash on the balance sheet) within the guidelines of the recently updated and revised HGT discount control policy.

HGT portfolio management

In addition to seeking to optimise the balance sheet through debt and equity capital markets, the Board also looks to take advantage of market driven opportunities to manage the portfolio construction of HGT, achieving the optimal balance of asset and vintage exposure through the Hg fund structures that contain the investments that make up the HGT portfolio. The rapidly increasing depth and sophistication of the secondary market for such private equity fund interests, provides a valuable additional tool to the Board in the management of HGT's exposure and liquidity.

As part of this process, HGT has agreed to sell c. 25% of HGT's remaining investment in Hg's Genesis 8 Fund. Hg Genesis 8, a 2017 vintage fund, has performed very strongly, and is currently valued at 3.2x invested cost, an outcome that is already above the fully realised performance of all Hg's historical funds. The proposed transaction envisages a sale to a leading secondary fund, an institutional Private Equity buyer of mature fund interests, at a price equal to 100% of Hg Genesis 8's December 2022 NAV. The pricing level achieved in this transaction provides further strong validation of the HGT valuation policy, given the independent price setting provided by the buyer. The proposed transaction will generate proceeds to HGT of just over £90 million.

The Board and the Manager have also agreed to take advantage of the opportunity to reduce HGT's commitment to Hg Saturn 3 by c. 15%, in light of the significant change in the deal environment since the establishment of the fund and, in addition, the c.15% appreciation of the USD against GBP. Drawn capital to-date will be repaid pro-rata to HGT, with no negative impact on the HGT balance sheet from the proposed resizing of the fund commitment executing these steps, as HGT is simply exchanging invested NAV at par for cash.

The adjustments to the HGT investment profile not only allow for significant cash to be returned to HGT at attractive valuations but allows for increased investment flexibility ahead of what is envisaged to be an attractive period for new investment, particularly through increased exposure to co-investments where HGT has a stated goal of investing up to 10% of capital. A final benefit of these proposed adjustments is that they provide a mechanism to help manage the single asset concentration in the largest individual investment in the portfolio, Access. We will keep shareholders informed on the progress of these transactions, subject to customary closing conditions.

The portfolio has continued to deliver strong operating performance in the last year, despite the many and obvious challenges presented in the broader global economy. Looking forward, the environment seems set to remain challenging, however the investment model adopted by HGT and the strength of the portfolio augurs well for its continued successful development.

Jim Strang, Chairman, HgCapital Trust plc

Impact and responsible investment

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

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 Responsible Investment: see pages 32 to 33 of the Manager's Review in the full Annual Report and Accounts

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.

As regards the current financial year, HGT will deliver a full year dividend of 7.0 pence per share (2021: 7.0 pence per share), payable in May. 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.

Dividend: see page 119 of the full Annual Report and Accounts.

Dividend re‑investment plan: page 32 in the full Annual Report and Accounts.

Board and governance

Peter Dunscombe retired from the Board and from his role as the Chair of the Management Engagement Committee (MEC) at the AGM in May, after 8 years of service to HGT. On behalf of myself and my fellow Directors, I would like to thank Peter for his significant contribution to HGT over his tenure on the Board. HGT benefited a great deal from his experience and wise counsel.

Dr Erika Schraner joined the Board in August and has taken on Peter's former responsibility as MEC Chair. Erika brings a great deal of relevant experience to HGT from a long and successful executive career in the technology sector, both in Europe and America, and I am sure will make a very significant contribution to HGT in the years to come. With Erika joining the Board, the composition of the Board is now equally balanced between male and female Board members. Over the course of this year, HGT will commence the process to recruit a further Director ahead of the next evolutionary step in the Board development, which will see Anne West retire in 2024. This new recruitment will be externally supported and will follow HGT's process for adding the requisite skills to the Board to meet evolving needs. As ever, this process will be targeted to provide a wide and diverse mix of candidates to further support HGT's progress on diversity in line with relevant guidelines.

I am pleased to report that the annual Board review process undertaken over the year and externally supported, shows the Board to be functioning very well. As part of the continuous effort to improve governance, the Board implemented a new software tool, BoardClic, to provide more objective insights into the effectiveness of the Board, by comparing the performance of the HGT Board with a large peer set. I am pleased to say that this process revealed the HGT Board to be amongst the highest scoring Boards on the platform.

Prospects

The year ahead seems set to be as volatile and uncertain as the year that preceded it. However, HGT is well placed to be able to navigate this uncertainty. The Manager, Hg, remains focused on its clearly defined investment strategy of backing resilient growth businesses, and has a proven ability to operate in challenging markets. Testament to that is the highly successful fundraisings completed by Hg in what is a very challenging market for private equity managers. The existing portfolio is robust and continues to deliver attractive organic growth, augmented by M&A. Given these factors, the Board believes that the year ahead can be approached with a degree of confidence.

Jim Strang
Chairman
10 March 2023

THE MANAGER'S OUTLOOK

Increasingly, we see this environment as one of opportunity, as valuation adjustments create the opportunity to acquire businesses with attractive long-term performance.

David Toms, Head of Research, Hg

Market update

We remain alert to the ongoing challenges in the broader economy from the geopolitical background, fiscal tightening, and cost increases, and are increasingly excited about the structural opportunities the current 'risk-off' environment could create for a long-term investor like Hg. 

A 'typical' downturn tends to lead with multiple contraction, followed by reduced earnings, and an eventual recovery catalysed either, in recent downturns, by central bank stimulus, or historically, corporate earnings recovery. For our sector going into an economic downturn, short-term changes in value are largely a result of changes in valuation multiples; while the eventual change in earnings forecasts is typically a fraction of the change in multiple that precedes it. For example, in the 2008/9 downturn, multiples accounted for about three-quarters of the total change in value. Earnings typically remain very robust in comparison. Looking at the current situation, public market valuations stabilised in H2 2022, after a significant decline in H1. This is consistent with increased investor confidence around the path of interest rates over the next two years. 

As important as multiples are for short-term changes in value, their relevance decreases with longer investment horizons, supplanted by the growing significance of earnings growth. We show in the graph below the relative contribution of movements in valuation multiple and earnings, to returns for major publicly listed software and services companies. For example, if the forward Price:Earnings ratio falls from 15 to 13.5, that is a negative 10% impact on overall returns in the year, and if the forward earnings forecast were to increase from 10 to 12, that would be a positive 20% impact. The shaded backgrounds represent cumulative returns from either earnings or multiple from 2003 up until the relevant year.

Over the total 20-year period of this graph, the multiple has delivered a negligible contribution to cumulative returns (broadly, good years and bad years cancel); the c. 8x total performance is almost entirely from earnings growth which was positive in 19 of the past 20 years.

As we move into 2023, the focus shifts to earnings where we are seeing a heightened level of downgrades to expectations from public companies. Although currency (specifically the strength of the USD) is an important factor in this, the broader backdrop is less benign than prior years, and we expect to see some pressure on sales to new customers who may be more reluctant to commit to new software and services solutions. Within our portfolio, such new business revenue is a small proportion of the total; the overwhelming majority of our portfolio companies can deliver revenue growth from the existing customer base alone, via cross-sell and up-sell. The impact across the industry, and our portfolio, from 2022's price increases (which may not take full effect until 2023), also helps to moderate any pressure from delayed new customer wins. These price increases across the sector result from a combination of ongoing long-term product innovation, and the greater value for customers of utilising software solutions in a constrained labour market (especially for higher-cost 'white collar' labour). This provides strong support for our ongoing view that inflation will have only a muted long-term impact on Hg investments.

A clear positive from all this is that as earnings reassert their dominance in valuation, we return to an environment where the operating performance of our portfolio once again becomes the main driver of value creation. We believe that the structural drivers of growth in our sector are, if anything, enhanced by the macro-economic shifts we see, as companies invest in technology in order to help offset wage and cost inflation. 

All investments sit within Hg's 'sweet-spot' in software and technology-enabled business services across eight industry verticals or 'clusters' and continue to show Hg's role as one of the largest software groups in the world.

Luke Finch, Head of Client Services, Hg

Valuation environment

We believe that we are moving from an environment dominated by macro factors, back to one where sector and company performance is the key driving factor. Valuations in 2021 and the first half of 2022 were dominated by macro factors, particularly interest rate expectations. These led to 'unprofitable software' experiencing a much greater decline than 'profitable software'. In the second half of 2022, all valuations (equities generally, software, and 'unprofitable software') saw a much more stable pattern. Throughout 2022, we also saw repeated evidence that there is still investor demand for the highest quality businesses, such as those that make up the Hg portfolio. Furthermore, the valuation environment for these businesses has been much more stable than public markets would suggest; we continue to see exits above book value, and well above public market comparators.

Our valuation process is based partly on public comparators, and similarly to our portfolio companies, the vast majority of these are profitable, established businesses. As we have shown in prior reports, 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 and private comparators, and growth in actual earnings. Our companies typically grow their EBITDA by c. 10-15% organically each year (i.e. c. 3-4% each quarter) and often double this on an 'all in' basis i.e. including M&A. In addition, our valuations also have to input observed private markets comparators, which have been far less volatile than the public comparators.

The latter two factors have meant that our funds have been less exposed to public market volatility (both on the way up and the way down), 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 2022, Hg invested more than £7 billion, primarily into 14 new and further investments, including £527 million on behalf of HGT.  All these investments sit squarely within Hg's 'sweet-spot' in software and technology-enabled business services across eight industry verticals or 'clusters', on which we exclusively focus. This investment continues to show Hg's role as one of the largest investment software groups in the world, whether measured as an investor, or as an industry participant. 

We have commented previously that in any rolling 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 have seen a period of reduced activity, which may continue through to the summer as seller expectations adjust and react to the macro-outlook and in particular the new interest rate environment. 

From any new investments we make, there is a further flow 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 over 45 B2B software and technology-enabled business services 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 of the businesses within Hg's portfolio now totals to over $120 billion at 31 December 2022.

OVERVIEW OF THE UNDERLYING INVESTMENTS

held through HGT's limited partnerships

¹Including accrued income of £133,534,000, but before a deduction for the provision for carried interest of £211,155,000 and fund level facilities of £367,383,000. Note that the investments held at fair within the Balance Sheet on page 59 of the full Annual Report and Accounts exclude accrued income but include the deduction for carried interest and the fund level facilities.

DIVIDEND

The final dividend proposed in respect of the year ended 31 December 2022 is 4.5 pence per share (following the interim dividend of 2.5 pence, bringing the full year dividend to 7.0 pence per share).

NOTICE OF ANNUAL GENERAL MEETING

The Annual General Meeting of the Company will be held on Wednesday, 17 May 2023 at 11.00 am at the offices of Hg, 2 More London Riverside, SE1 2AP.  The formal Notice of AGM can be found within the Annual Report.  The Board is of the opinion that the passing of all resolutions being put to the AGM would be in the best interests of HGT and its shareholders. The Directors therefore recommend that shareholders vote in favour of all resolutions as set out in the Notice of Meeting (pages 126 to 133 of the Annual Report available on HGT's website) as they intend to do in respect of their own shareholdings.

FURTHER INFORMATION

HGT's Annual Report and Accounts for the year ended 31 December 2022 (which includes the notice of meeting for the Company's AGM) will be available today on www.hgcapitaltrust.com

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

ENDS

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