With a portfolio enterprise value of more than $130bn, Hg is Europe’s largest software investor. The £10.6bn aggregate revenue of its portfolio companies ranks second only to SAP in the European tech sector.
Hg uses its deep sector knowledge of business-critical software and services industries to invest in unquoted companies and help them grow organically, as well as through acquisitions. Its funds are sourced from pension plans, sovereign wealth funds, endowments, insurance companies, private banks and HgCapital Trust (HgT) as a cornerstone investor.
A UK 250 investment company, HgT is managed by Hg and has become well-known in the market, having achieved a 10-year average share price return of 18.4% pa.
Large institutions including BlackRock, JPMorgan and UBS are firmly established on HgT’s shareholder register, a register that features many funds with hundreds of tech sector holdings.
Yet because HgT is structured as an investment trust, the scale, focused nature of its investments – software and services – and inherent synergies between the companies are perhaps less high profile.
According to Robert Murphy, Edison’s managing director of financials: ‘We strongly suspect that many investors in European tech may not have actively assessed whether HgT has a fit with their strategy. This is especially true in Europe given the dearth of liquid listed software companies with a market cap above $2bn.
‘As a result of the team’s focus on key specialist verticals and Hg’s peer-leading ESG credentials, many potential shareholders might find they have a mandate to take a closer look.’
HgT’s latest results highlight that the fund has delivered a total return of 2,370% over 20 years for shareholders who reinvested all dividends, a compound return of 17.4% pa. In contrast, the UK All-Share delivered 5.3% pa over the same period and the Nasdaq Composite 13.7% in GBP, or 11.8% when measured in USD.
Edison director of investment trusts, Milosz Papst, says: ‘The portfolio has benefited from the structural trend towards digitalisation of business processes for many years, which further accelerated during the COVID-19 pandemic.
‘We do not expect to see this trend slowing. The forecast Gartner released in January projects spending growth of 12.7% this year, after 12.4% in 2023. Enterprises are still seeking a competitive edge via technology.’
Milosz has developed a bull and a bear case for the stock. The bull case helps explain why, on the day of the FY23 results, the trust had a relatively narrow 8% discount to NAV, an improvement from 22% at the end of 2022. He is positive about the trust’s focus on resilient companies with broad client bases, the way in which portfolio businesses continue to deliver solid financials and HgT’s experienced team.
Of course, the bear case must also be considered. Investor rotation away from tech could resume if the market becomes more risk averse. Worsening economics could also reduce net client additions across HgT’s investments. It should also be noted that the portfolio has high net leverage, albeit supported by 90% recurring revenues, earnings growth and high cash generation.
These risks are likely nothing new to tech investors.
‘All in all, we suspect many more might do well to take a look at HgT’, says Robert. ‘As it’s a liquid stock, there’s already a wide variety of shareholders on the register with different investment styles and objectives. It has proved itself across economic cycles. I would not be at all surprised to see further shareholder diversification.’
If you would like to talk to Rob or Milosz about HgT, drop them a line to arrange a call.
You can read the latest analysis on the stock here and review all historical reports here.
