HGCapital Trust: giving access to private tech companies

The trust, included in our IC Top 100 Funds list for 2020, has been the best performing private equity trust in terms of share price over the past year according to FE Analytics data, and recently reported an increase in net asset value of 12 per cent for the first eight months of 2020. 

The trust invests in 30 companies via three institutional-only funds run by Hg. Each fund has the same investment strategy, but targets different sized companies, ranging from an enterprise value of £75m to over £5bn. HgCapital Trust accounts for approximately 12 per cent of Hg’s total assets under management.

“The one thing that links all of our investments is that we are really looking for companies that sell a business-critical product or piece of software,” says Luke Finch, partner at Hg. He explains that Hg seeks to add value to companies by taking an active role in management and helping companies within the portfolio learn from each other and adopt best practices.

Hg employs 200 people across London, Munich and New York and will typically provide each portfolio company with board members and a team of software experts to help implement change programmes. Hg looks to invest in roughly three or four companies across each fund every year, typically with a three- to four-year investment case, although they have owned some companies for significantly longer.

“We like to think of ourselves as a very large software company that is funded by private equity funds,” Mr Finch says. “We are able to be a very credible partner for software company chief executives and founders, and can teach them things about their business that they didn’t know – we are not just a big bag of money with ever decreasing cost of capital, which is sometimes a charge thrown at the industry.”

Over the past 20 years, the trust has made an annualised share price total return of 14 per cent. Over the past decade, its net assets have grown at a compound annual rate of 13 per cent, bringing total assets to £1.15bn, according to Winterflood data.  

Hg values every holding within the portfolio quarterly by looking at comparable listed businesses and any precedent transactions that have recently occurred. When they come to sales, companies normally sell above their book value because prices are based on forward earnings, which tend to be higher.

The largest company in the trust is business software company Visma, which Hg delisted from the Oslo stock exchange in 2006. Mr Finch says Visma has grown from having an enterprise value of €400m 15 years ago to around €10bn now and is “like a prototype” for where private equity is going. 

Visma is owned by a number of private equity firms and Mr Finch says the management see themselves as a private public company, as they report like a public company but prefer to have investors with a long-term view.

The trust has made a number of investments this year, despite the pandemic, and Mr Finch says “business criticality” is the common thread running through all recent purchases. Intelerad Medical Systems, for example, captures and manages radiology images, and can help distribute vital information and workflow solutions to the medical community.   

Other investments made this year include SmartTrade, a North American leader in multi‑asset electronic trading solutions, P&I,  a leading provider of cloud‑based HR software based in Germany and Argus Media, a global provider of energy and commodity price reporting.

Hg invests in companies across eight clearly identified “clusters”, which includes companies that deliver legal and health and safety advice, businesses that help with taxes and payroll, and those that deliver healthcare services.

One company in the portfolio, Allocate, a provider of workforce and resource planning solutions, was chosen to help solve any staffing issues at several of the UK’s dedicated Covid‑19 field hospitals, with their HealthRoster Optima software being used to e‑roster staff. 

“Intersection of workflows, data and frankly expensive workforces is where we get very excited because that is often where you find very business-critical software,” Mr Finch says.  

He adds that due to their defensive growth characteristics, the companies in the trust have been resilient over the pandemic and should continue to be less disrupted by the macroeconomic backdrop than the broader economy.

Because the trust provides direct, targeted exposure to software companies, the total cost of investment is lower than for other private equity trusts which offer fund of fund exposure to the sector. All performance figures shown are net of charges.