HgT (LSE: HGT)

Last close As at 23/11/2024

GBP5.37

7.00 (1.32%)

Market capitalisation

GBP2,458m

HgT’s investment objective is to provide shareholders with consistent long-term returns in excess of the UK All-Share Index by investing predominantly in unquoted companies where value can be created through strategic and operational change.

Equity Proposition

HgT is a private equity company, which invests in leading, profitable, unquoted European mid-market businesses with an international footprint, offering mission-critical, low-spend software solutions to small and medium-sized enterprises (SMEs). It currently holds a portfolio valued at c £2.5bn consisting of around 50 such holdings and HgT provides high-quality exposure to the corporate digitalisation theme.

1) The digitalisation trend may persist for many years to come.

Hg’s (the trust’s manager’s) head of research recently examined IT spending patterns across countries and found that the share of software spending grows with the level of overall IT spending as a percentage of GDP. This suggests that the sector is not approaching saturation, even in the more developed economies. According to Gartner’s forecasts released in April 2024, global spending on software and IT services will grow by 13.9% and 9.7% in 2024, respectively (after increasing by 12.6% and 6.1% in 2023, respectively).

2) HgT’s portfolio companies deliver strong, highly profitable growth.

The trust offers a combination of a high share of recurring revenues based on software-as-a-service subscription models and high customer retention. Hg’s ‘sweet spot’ lies in defensive tech growth companies operating in one of eight core end-markets: tax and accounting; ERP and payroll; legal and compliance; automation and engineering; insurance; SME tech services; capital markets and wealth management IT; and healthcare IT. HgT has historically delivered revenue and EBITDA growth of around 20–30% per annum at a margin above 25% across its top 20 holdings. Therefore, it fulfils the so-called ‘Rule of 40’, which is a rule of a thumb (but based on empirical evidence) saying that software stocks with combined revenue growth and EBITDA margins of 40% or more typically generate higher valuations.

3) Hg’s extensive sector expertise allowed HgT to deliver healthy returns.

The vast tech expertise and value creation capabilities of Hg come from a combination of three strengths: firstly, its in-house team of operational experts, which includes more than 50 senior operational specialists, each supported by a network of trusted third-party associates and partners; secondly, an extensive community consisting of key managers from its portfolio companies (called Hg Hive); and thirdly, intellectual property, tools and group services on which its portfolio companies can rely. As a result, the trust posted a strong NAV return over the 10 years to end-March 2024 of 18.7% per annum.

4) HgT has continued to deliver a high level of liquidity events.

HgT generated around £346m of realisation proceeds (or 17% of its NAV), excluding carried interest in FY23. This included several full and partial exits, as well as secondary sales. The trust’s ability to deliver meaningful liquidity events in the tough environment should be put in the context of the decline in the global private equity exit activity in 2023, which was down around 66% from the 2021 peak.

5) The trust has a strong track record of realising investments at an uplift to carrying value.

Between 2017 and 2022, the trust’s exits were completed at an average uplift to carrying value at the end of the preceding of a solid 38%. Even in 2023’s demanding environment, marked by low deal activity and pressure from higher interest rates, the trust was able to realise investments at a price that was, on average, 25% above the end-2022 carrying value. We believe that this is a testament to the quality of the trust’s portfolio and its conservative valuation approach.

Latest Insights

View More

Investment Companies | Flash note

HgT — Steady earnings growth, stable market multiples

Investment Companies | podcast

Uncovering Trusts – HgT’s H124 results discussion

Investment Companies | audiovisual

HgT in 60 seconds

Investment Companies | Review

HgT — Consistent returns from private tech businesses

Equity Analyst

Milosz Papst

Milosz Papst

Head of Content, Investment Trusts

Key Management

  • George Crowe

    IR

  • Laura Dixon

    Senior Investor Relations Manager

Share Price Performance

Price Performance
% 1M 3M 12M
Actual 4.7 (0.8) 36.1
Relative 8.4 1.7 25.9
52 week high/low 548.0p/391.5p

Overview

HgT reported sustained healthy earnings momentum across its major holdings (driven primarily by upselling and cross-selling opportunities), contributing 5pp to its NAV performance in Q324. Its top 20 holdings (which make up 76% of its portfolio value) posted last 12-month sales growth of 20% (of which 12% was organic) and 24% EBITDA growth to end-September 2024, achieved at a 34% average EBITDA margin. The positive earnings impact on NAV was offset by adverse currency movements (sterling strengthening) of 3pp, the main contributor to the 0.9% NAV total return (TR) decline in Q324. The negative fx changes partly reversed post quarter-end. Continued positive momentum across HgT’s portfolio, coupled with stable valuation multiples since the start of the year, brought HgT’s year-to-date NAV TR to 5.5%. This was accompanied by an average 16% uplift to previous carrying value for full and partial realisations completed to date. HgT’s five- and 10-year NAV TR remains strong at 17.6% and 18.4% pa, respectively.

Research

Review

Investment Companies

HgT — Consistent returns from private tech businesses

Flash note

Investment Companies

HgT — Preliminary H124 NAV total return of 5.6%

Update

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HgT — Strong earnings growth and realisations in FY23

podcast

Investment Companies

Uncovering Trusts – HgT (HGT)

Flash note

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HgT — Preliminary FY23 NAV TR at 10.7%

Update

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HgCapital Trust — Seizing ‘buy-and-build’ opportunities

Review

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HgCapital Trust — High quality, high growth, high margin

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HgCapital Trust — Improving its commitment coverage ratio

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