Hg cashes in

Much has been made of the potential for an increase in merger-and-acquisition activity and new share issues to help private-equity funds dig themselves out of a hole. However, the real money made by private equity over the business cycle comes from new investments made at depressed times like these. Not many private equity funds are in a position to exploit this. HgCapital is one such.

It is also one of the few listed private-equity funds that can claim to have played the cycle with some panache and avoided the temptation to borrow heavily itself to invest in heavily indebted companies. This has left it with cash to invest at a time when business sellers are getting increasingly desperate. So the trust, which invests alongside bigger stakes taken by the HgCapital private equity group, has committed £280m to a new Hg fund. One significant new investment has already been made by the fund in the buyout of medicines supplier Goldshield. The trust has also participated in recent investments in renewable energy via its stake in Hg Renewable Power Partners, which accounted for 3.4 per cent of net assets at the end of September.

Broker Oriel Securities estimates that, even after the Goldshield deal, almost 40 per cent of Hg's net asset value is "investable cash", which means it is well placed to keep hunting out deals. However, Hg believes the opportunities are so great that it wants to raise new money by selling new shares at around the current price. There will also be subscription shares attached to new shares and for existing shareholders, which act as a warrant on the share price going up and could provide a nice kicker.

Issuing shares at a discount will dilute the net asset value (NAV), which is expected to be above 935p when the company announces its full-year results early next month. However, the opportunities to invest are considered greater than the cost of the issue. The flip side to having so much cash is that Hg is less exposed to any recovery in the value of its existing investments. And, following massive writedowns to the value of private equity's investments since the credit crunch began, many sector watchers now hope that 2010 will see a big bounce in values. However, many expected floats have recently been delayed

Given rising uncertainties about the IPO market, HgCapital's portfolio offers an attractive degree of safety. The cash element offers protection against downside risk as well as the potential to do deals. What's more, the fund's investments are concentrated in a portfolio where the top 10 holdings account for 77 per cent of all its investments. This means Hg's managers can take a hands-on approach with their investee companies. Furthermore, the fact that Hg focuses on medium-sized European companies, with an enterprise value of up to £500m, means it should find it easier to achieve exit routes than if it were doing mega deals. Indeed, there have recently been rumours that the trust's largest holding, Norwegian business software group VISMA, may float its shares. That said, the present weakness of the euro will hurt the value of some holdings.