HG Capital Belief (HGT) goals to offer shareholders with constant long-term returns forward of the FTSE All-Share Index.
It invests primarily in unquoted firms, focusing on a portfolio of round 30 development holdings past the enterprise capital stage, and creating worth by way of strategic and operational change.
Other than outperforming the FTSE All-Share, the corporate has no specific goal return. Nonetheless, on the stage of particular person investments, it goals to realize a gross inner fee of return of 23-25%. The main target is on firms that provide software program and providers throughout Europe, with enterprise values starting from £50m to greater than £5bn.
HGT shows the traits of a tech conglomerate and isn’t a personal fairness fund of funds. In response to the corporate, if HGT was categorised as a tech conglomerate, it could be the second-largest and fastest-growing know-how enterprise in Europe, with current tech investments valued at round £33bn and offering superior top-line development.
HGT’s administration incentive system is seemingly efficient, as every group is individually incentivised to align its curiosity with the portfolio firm by way of a share in enterprise efficiency.
As well as, in contrast to a standard conglomerate, HGT will realise every funding, continually refreshing its group with youthful firms coming into their high- development section.
The funding technique assumes the usage of co-investments, which permit the corporate to handle its steadiness sheet extra successfully and cut back the entire charge load. In response to the just lately agreed framework, HGT goals to allocate 10-15% of the steadiness sheet to co-investments, versus 6.2% on the finish of 2020.
HGT posted a powerful internet asset worth (NAV) complete return of 24% in 2020, of which round 3.6% was generated within the fourth quarter. This compares with the 9.8% decline of the FTSE All-Share in 2020, and the 1.9% rise of the Europe Listed Personal Fairness Index over the identical interval, on a complete return foundation.
HGT’s NAV complete return in 2020 was primarily assisted by earnings development throughout its portfolio firms, with the highest 20 investments representing 83% of complete investments by worth at end-2020. It delivered the previous 12 months’ earnings earlier than curiosity, taxes, depreciation, and amortisation development of 31% yr on yr, versus 29% at end-September 2020.
In response to the supervisor, year-on-year gross sales development throughout the portfolio was within the excessive single-digit share vary.
HGT highlights sturdy and constant buying and selling from nearly all of the portfolio, specifically software program and enterprise options suppliers like Mitratech, Allocate, Entry, IT Relation, Intelerad, Visma and world fund supplier FE Fundinfo, which collectively represented round 36% of its NAV on the finish of 2020. Solely EidosMedia, which represented lower than 0.1% of the portfolio at end-2020, carried out beneath HGT’s expectations in 2020, and was written down throughout the interval.
HG Capital Belief
|Premium to NAV||4.8%|
*Together with earnings. As at 28 February 2021.
Supply: Milosz Papst and Richard Williamson, Edison
Funding Technique – Software program and providers candy spot
HGT’s ‘candy spot’ is buyouts of defensive tech development firms working in considered one of eight core finish markets: tax and accounting; ERP and payroll; authorized and compliance; automotive; insurance coverage; SME tech providers; capital markets and wealth administration IT; and healthcare IT.
These firms ought to show excessive ranges of recurring and contracted revenues generated from services or products which can be enterprise essential however sometimes low-spend. Specifically, this contains options delivered in a cloud SaaS (software program as a service) setup.
HGT seems for companies which can be ready to make use of their mental property amassed over a number of years to generate excessive margins. It additionally prefers firms with a excessive stage of buyer loyalty and low sensitivity to market cycles, in addition to low buyer penetration, which can be considerably enhanced utilizing a SaaS cloud framework.
HGT goals to amass companies ranked second to fourth of their respective markets and create the main participant by way of add-on acquisitions. This strategy appears notably compelling within the context of present valuations within the SaaS market, which stay comparatively demanding and name for extra subtle personal fairness methods than plain monetary engineering.
HGT’s key aggressive benefit is its sturdy involvement within the strategic improvement and worth creation of its portfolio holdings. We see this as a very essential differentiator in an adversarial macro-environment, given that personal fairness firms with in-house worth creation groups are inclined to outperform the broader personal fairness house within the interval following a market downturn. HGT’s excessive diploma of involvement helps its deal-origination course of.
The Supervisor’s View – Digitalisation of enterprise is a boon
In response to HGT, Covid-19 has had a restricted adversarial impression on the portfolio and it believes it might proceed to profit from the rising digitalisation of enterprise processes, which has been accelerated by the pandemic.
Its UK-based companies have seen restricted direct penalties from Brexit, given the way in which software program providers are delivered to shoppers. Enterprise providers had been sometimes already exterior most current EU commerce laws. Furthermore, Brexit trigged elevated demand for software program options for shoppers at a few of its portfolio firms amid rising regulatory complexity post-Brexit.
In a typical 12-month interval, the supervisor makes between eight and 16 platform investments and seeks to ship an analogous variety of liquidity occasions over the interval, resembling gross sales, partial gross sales and refinancing.
HGT expects its transaction exercise will stay excessive in 2021, with some realisations at the moment underway or particularly deliberate for this yr. The supervisor will keep its cautious and selective strategy and concentrate on capitalising on conditions the place it has a selected angle, long-term information of the enterprise and its end-market, and powerful relationships with founders and administration groups. Bolt-ons and strategic M&A inside the portfolio stay a key focus.
Environmental, social and governance (ESG) is embedded in HGT’s funding course of and the supervisor actively engages in bettering ESG practices throughout portfolio firms.
This contains periodical evaluation of ESG efficiency of investments, which is measured in opposition to HGT’s inner Accountable Enterprise Framework.
The corporate expects sure ESG necessities from all its companies, together with compliance with governance, authorized, knowledge and cybersecurity requirements.
The typical ESG rating of portfolio firms in HGT’s inner evaluation in 2020 was 8 out of 10, with a mean enchancment of twenty-two% in contrast with earlier assessments. For each enterprise in its portfolio, HGT targets an ESG rating of a minimum of 8 by the second yr of evaluation.
In 2019, a Local weather Change Danger Evaluation instrument was developed in co-operation with PwC, tailor-made to seize local weather dangers within the software program and providers industries.
It was discovered that none of HGT’s companies face excessive transition dangers to a low-carbon financial system or bodily dangers, such because the rising bodily impacts of local weather change, associated to operations, whereas solely a small variety of firms face excessive transition dangers throughout their provide chains and knowledge centres.