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.
