Some private equity investment trusts have hundreds of holdings because they invest in other private equity funds that hold dozens of unlisted companies. But others are a lot more concentrated, for example HgCapital Trust, which only has exposure to 34 holdings. And these are mainly in one sector because its manager Hg focuses on unlisted technology and tech-enabled service businesses.
But the trust's focus on unlisted companies in what is considered to be a high-risk sector seems to be working: it has made long-term returns in excess of the FTSE All-Share Index, in line with its objective. As of 12 July, it had made share price returns of 18 per cent, 93 per cent and 97 per cent over one, three and five years, respectively, compared with 8 per cent, 28 per cent and 44 per cent for the FTSE All-Share.
And over the 20 years to 31 May HgCapital Trust's share price achieved a compound annual growth rate of 14 per cent a year compared with 5.5 per cent a year for the FTSE All-Share.
Luke Finch, director of client services at Hg, is confident that they will continue to find the kind of "boring tech" businesses that have helped them to achieve this.
"We buy companies that have very little [interaction with] the average consumer," he says. "Our holdings are mostly business-to business companies that produce unglamorous stuff such as tax, accounting and insurance software, and do enterprise resource planning. But these things are mission critical for a lot of European companies."
If there is an economic downturn HgCapital Trust's investments could lose value or experience slower growth, and the customers the trust's investments sell their software to would be more likely to go bust.
But Mr Finch argues: "In a downturn companies often turn to systems as a way of increasing efficiency, so this trust is a defensive growth portfolio."
During the financial crisis, the trust's net asset value (NAV) continued to grow, albeit at a slower rate. And Hg was also fortunate to have been a net seller of assets during 2006 to 2008. The trust's cash, as a percentage of NAV, reached a high of 55 per cent at the start of 2008.
"At the beginning of that year the trust was getting comments from analysts concerned about cash drag – but not by the end of the year," says Laura Dixon, senior investor relations manager at Hg.
Between 2009 and 2015 Hg was a net buyer of unlisted companies, but since 2016 it has been a net seller, and cash as a percentage of HgCapital Trust's NAV is currently 25 per cent. Its managers have sold 17 companies over the last 18 months, which accounted for more than 50 per cent of its portfolio in 2016.
"We were seeing behaviour from lenders and in the auction processes that made us feel that things were quite late in the cycle, meaning it was a good time to sell," says Mr Finch. "But you never know when you're at the peak of the cycle until you're six to nine months past it, so we don't want to completely avoid making new investments."
So this year HgCapital Trust has invested in companies including FE, a data, analytics and software vendor focused on the European retail investment funds market; Access, a UK provider of business management software to mid-market companies; and MediFox, a provider of software solutions to outpatient and inpatient care providers in Germany.
HgCapital Trust only invests in deals sourced by its manager Hg, which manages assets worth around £10bn in total, and regularly raises cash from global institutional investors for its funds. HgCapital Trust commits capital to Hg's funds through which it gets exposure to companies that Hg picks. These typically have an enterprise value (EV) of between £20m and over £1bn, and are predominantly based in Europe.
HgCapital has future commitments worth £533m, equivalent to 72 per cent of its NAV, which should be invested in over the next three to four years, although it can opt out of a new investment without penalty if it does not have the cash available to invest. This means its cash levels should reduce further.
But Ms Dixon adds: "If people are paying tomorrow's price for a company today, we will sell it. You can't fall in love with these companies – our aim is to return good money to our clients."
Luke Finch and Laura Dixon CV
Luke Finch is head of client services at Hg. He focuses on investor coverage, fundraising, co-investment syndication and client service management. Mr Finch joined Hg in 2010 after seven years at Lazard where he worked on mergers and acquisitions, and capital raisings.
He has an MA in Modern History from Oxford University.
Laura Dixon is senior investor relations manager at Hg, where she has worked since 2010. Before this she provided investor coverage for hedge fund clients at NewSmith Asset Management, and has also worked at Smith New Court and Merrill Lynch.
