Appendix: Five of the principal portfolio holdings
Visma: SME business software and services
Exhibit 24: Visma investment summary
Investment |
Fund |
Sector |
Location |
Year of (latest) investment |
Unrealised value (£'000) |
Value (% of NAV) |
Visma* |
Hg Genesis 7/ HGT/Saturn |
Technology |
Scandinavia |
2014 |
129,177* |
16.3%* |
Source: HgCapital Trust (data at 30 April 2019), Edison Investment Research. Note: *30 April 2019 data exclude: 1) Hg’s further investment in Visma (announced on 18 April 2019), where HGT contributed approximately £19.5m, increasing Visma’s portfolio weighting to c 20.5%; and 2) the impact of the Litera Microsystems deal announced on 7 May 2019.
Visma is a leading provider of business-critical software to SMEs and the public sector in the Nordic and Benelux regions. It is headquartered in Oslo with significant revenues in Norway, Sweden, Finland, Denmark and the Netherlands. Visma has more than 8,500 employees across its network, including 3,400 software developers. The company serves 900,000 enterprise customers offering software and services including accounting software; HR and talent management solutions; enterprise resource planning and payroll software; and transaction process outsourcing, such as debt collection and procurement.
Strategic outlook
Visma operates in the Nordic region, high cost, tech-savvy markets with a strong drive for increasing efficiency, providing customers with software solutions that make their business and admin processes more efficient than their competition. Visma’s leading regional competitors include Evry, Sage and Tieto with many other software/ERP providers providing overlapping solutions in other markets (eg Intuit, Xero).
Over the next few years, Visma will be looking to expand into similar, well regulated, stable countries through the acquisition of market leading local SaaS companies (eg Hungary and Poland in 2018). Visma wants to be a market leader in new territories, consolidating its local leadership position, rather than spreading itself thinly (eg 2018 saw the acquisition of Raet in The Netherlands, a market leader in HR and government software, together with other niche software providers).
Investment in product development and innovation is a key success factor. As such, Visma has an ongoing programme to rewrite and convert all of its solutions from Windows to cloud. In 2017, R&D expenses amounted to c 15% of revenues, of which approximately two-thirds are related to SaaS projects. This conversion programme (and therefore a similar level of R&D spend) is expected to continue until 2020.
Market background
As well as considered geographic expansion, we anticipate continuing M&A activity in Human Capital Management (HCM) software (recruiting, talent management, learning, collaboration and engagement). A number of Visma’s recent acquisitions have been in the HCM software space and adjacent areas, including learning and training. This is a core focus for Visma as the HCM software market is still fragmented and employee experience is a growing point of differentiation in tight labour markets, with more money allocated to HR budgets. This strategy ties in with the core thesis behind the M&A-driven model of adding new offerings into Visma’s existing marketing channels.
Hg saw Visma’s SaaS potential early
Hg initially invested in Visma in 2006 at a valuation of c €450m, having identified regulatory-driven, subscription-based software as an attractive sub-sector with scope for considerable growth. Hg was attracted by Visma’s high degree of recurring revenues, serving a fragmented SME customer base with business-critical application software – today’s ‘sweet-spot’ investment criteria. As well as the potential for organic growth and acquisitions, Hg was drawn by the opportunity to accelerate Visma’s transition to a SaaS-focused business model. As at Q119, monthly SaaS e-invoicing transactions are growing at 27% y-o-y.
A serial investor and re-investor over the past decade and more
Following Hg’s initial investment, the business became one of the leading SaaS companies in Europe through a combination of organic and M&A-driven growth. In April 2014, following KKR’s decision to sell part of its original 2010 stake, Hg chose to sell its remaining holding, generating a total return between 2006 and 2014 of 5.2x original cost and a gross IRR of 33%. Via the Hg Genesis 7 Fund and co-investment, Hg clients then reinvested £409m in the business for a 31% stake as a co-lead investor, alongside KKR (reinvesting) and Cinven. This valued the business at a total EV of NOK21.0bn (£2.1bn).
In 2017, Hg announced further investment into Visma following the sale of KKR’s stake, valuing the business at NOK45bn (£4.2bn). In 2018, Hg made a further investment in Visma (via Hg Saturn) and in 2019 brought in the Canada Pension Plan Investment Board (CPPIB) as an investor, valuing the business at NOK61bn (£5.5bn). In April 2019, together with CPPIB Hg and its investors acquired Cinven’s residual stake in the company, allowing Cinven to exit in a deal valuing Visma at €6.5bn. This continued reinvestment in Visma reflects Hg’s conviction in the strength of the business, backing a proven management team with a strong track record of creating investor value. HGT’s residual stake in Visma is valued at £129m as at 30 April 2019. However, following HGT’s latest investment, we believe this valuation (and its portfolio weighting) will rise once the deal completes.
Organic growth supported by M&A
Since 2006, Visma has acquired over 150 companies across the Nordic and Benelux regions. This aggressive M&A agenda has supplemented organic growth from product innovation and additional margin improvement from the reorganisation of Visma’s internal processes. Visma is now positioned as one of the leading SaaS companies in Europe, with US$1bn of true cloud revenues in 2018 and US$612m of annualised recurring pure SaaS revenues (65%+ of revenues are pure SaaS). The company continues to see double-digit revenue and EBITDA growth (33% and 32% respectively in FY18), including M&A, and generated revenue CAGR over 2001–2018 of 18% and EBITDA CAGR of 27% (22% per year since 2009). Visma expects to continue its high rate of acquisitions for the foreseeable future.
Sovos: B2G tax compliance software solutions
Exhibit 25: Sovos investment summary
Investment |
Fund |
Sector |
Location |
Year of (latest) investment |
Unrealised value (£'000) |
Value (% of NAV) |
Sovos |
Hg Genesis 7/HGT |
Technology |
N. America |
2016 |
68,568 |
8.7% |
Source: HgCapital Trust (data at 30 April 2019), Edison Investment Research
Sovos is a leading global provider of business to government (B2G) tax compliance software solutions, headquartered in Boston, Massachusetts. Most revenue is generated from a US customer base of c 4,500 businesses (predominantly large enterprises), but the company also has a developing presence in Europe and Latin America. Services include sales, tax determination and filing, 1099 and 10 series tax information reporting, beverage alcohol compliance reporting, VAT compliance reporting, e-invoice filing and reporting, and Automatic Exchange of Information reporting (FATCA, CDOT and CRS).
Market background
A global B2G tax compliance market has only evolved over the past few years after becoming established in Latin America, notably Brazil, to increase government tax take and transparency. Digitisation of tax payments is now being adopted worldwide. Sovos has positioned itself to become a market leader in this new segment, reflected in its B2G revenues having risen from $0m to $50m over the past two years, with 17% growth anticipated in the current year. Other leading tax and accounting software solutions are also pushing into this market, with leaders such as Intuit, Xero, Avalara and Vertex.
A ‘sweet-spot’ investment proposition
Hg tracked Sovos (previously Taxware) for two years after identifying it as a scale specialist in tax compliance for enterprise customers. Sovos sits in the Hg ‘sweet-spot’ with a strong and predictable business model including c 95% contractually recurring revenue; a fragmented, loyal customer base; high margins; and robust cash conversion. Sovos’s largest core products have achieved close to double-digit organic revenue growth. In addition, Hg saw the potential to expand the company outside the US market.
Organic growth supplemented by M&A
Sovos has seen rapid growth since Hg’s initial investment in early 2016, driven by strong organic growth in its core products. In addition to continuing to grow revenues organically, Sovos has a strong track record of acquiring and successfully integrating tax compliance software companies. The market remains fragmented and Hg believes there will be continuing M&A opportunities as well as additional profit growth potential through further margin improvement.
In June 2016, Sovos announced the acquisition of Invoiceware International, based in Atlanta and Sao Paulo. This expanded the company’s capabilities in Latin America and added the industry’s only solution for handling electronic invoicing and fiscal reporting in multiple countries from a single platform. In August 2017, Sovos announced the acquisition of Paperless, based in Santiago, Chile, which complements Invoiceware’s product offering and provides Sovos with a sector-leading solution for business to government reporting – a form of regulatory compliance that has spread to more than 60 countries. In July 2018, Sovos completed the acquisition of TrustWeaver, a leading provider of cloud software that helps businesses authenticate and centrally archive electronic documents for VAT audit purposes, extending Sovos’s e-invoicing footprint across the EMEA region.
Attractive returns with more to come
HgT’s stake in Sovos is valued at £81.1m (of a total Hg investment of £262m), with a 2.1x gross valuation multiple at December 2018 representing a gross IRR of 40%. Sovos has generated a revenue CAGR of 12% over 2015–2019 and a corresponding EBITDA CAGR of 19%.
IRIS Software Group: SME accounting software
Exhibit 26: IRIS investment summary
Investment |
Fund |
Sector |
Location |
Year of (latest) investment |
Unrealised value (£'000) |
Value (% of NAV) |
IRIS |
Saturn |
Technology |
UK |
2018 |
45,387 |
5.7% |
Source: HgCapital Trust (data at 30 April 2019), Edison Investment Research
IRIS Software Group is a leading UK-only provider of business-critical software solutions for compliance and regulatory-driven industries, such as accountancy, education, bookkeeping and human capital management. Over the last decade, IRIS has become one of the most trusted providers of business-critical software and services to SMEs in the UK. Over 21,000 accountancy practices, 10,000 schools and academies and more than 80,000 SMEs, corporates and payroll bureaus rely on IRIS.
Market background
The UK remains a competitive market, with disruption driven by the government’s Making Tax Digital (MTD) initiatives (eg mandatory MTD VAT service from April 2019) as well as new lower-cost entrants targeting the accountancy practice market. In 2018 this led to significant disruption with market leaders including Thomson Reuters, Wolters Kluwer, Sage and IRIS losing market share to lower-cost cloud alternatives for their internal systems. This competitive pressure prompted IRIS to accelerate its own transition to a SaaS model, supported by Hg.
Competitors include Intuit, Xero, Advanced Business Solutions and Epicor as well as global groups such as Thomson Reuters, Wolters Kluwer and Sage.
Investment track record spanning 15 years
Hg and IRIS have a longstanding history, starting with the 2004 buyout led by Hg. Hg then retained a minority shareholding following IRIS’s sale to Hellman and Friedman in 2007. In 2011, Hg again became the majority shareholder through an investment by the Hg6 Fund. In September 2018, Hg6 completed the sale of IRIS to Hg Saturn and Intermediate Capital Group in a joint control deal, at an EV of £1.3bn.
IRIS is an early example of Hg’s focus on business-critical software firms operating in attractive, predictable end markets. The original investment decision was based on the potential for organic growth and acquisition-led consolidation. IRIS operates a highly recurring business model with over 85% of revenues from software and managed service subscriptions, much of which is based on annual renewals paid in advance.
IRIS continues to deliver added value to its existing customers through regulatory and feature updates, leading to high customer loyalty. The strong level of re-investment into new product development and outstanding customer support has continued to fuel outperformance vs other providers, delivering organic growth of c 9% per year.
A continuing and attractive investment proposition
The UK accountancy and SME software markets remain fragmented, offering additional acquisition opportunities. IRIS has always been at the forefront of providing innovative products to its customers and continues to invest in new technology to meet their needs. Hg believes there is substantial upside in broadening IRIS’s SaaS offering to target adjacent sectors.
IRIS has successfully expanded its offering, both organically and by acquisition. It has also established a cloud division to sell SaaS products to UK accountants and SMEs. In 2016, IRIS acquired Octopus HR and PS Financial, then SAAF Analytics, Results Squared and ParentMail in 2017 and Contact Group, Taxfiler and STAR Payroll in 2018.
Exhibiting consistently strong growth
IRIS has been able to maintain strong levels of revenue, EBITDA and cashflow growth across market cycles with an 18% EBITDA CAGR (2002–19) and 13% CAGR since 2009. For the past few years, revenues have seen high double-digit growth rates year on year and the annual EBITDA margin has consistently been close to 50%, excluding the investment in its cloud division.
The Access Group: Business management software
Exhibit 27: Access investment summary
Investment |
Fund |
Sector |
Location |
Year of (latest) investment |
Unrealised value (£'000) |
Value (% of NAV) |
The Access Group |
Hg Genesis 8 |
Technology |
UK |
2018 |
35,388 |
4.5% |
Source: HgCapital Trust (data at 30 April 2019), Edison Investment Research
Access is a provider of fully integrated, business-critical business management software to over 16,000 UK mid-market organisations. It has over 1,600 employees and its software supports companies in the finance, HR, payroll, hospitality, recruitment, health and social care, manufacturing and distribution, education and not-for-profit sectors.
In June 2018, Hg Genesis 8 completed an investment in Access at an EV of £1.0bn. As part of the transaction, TA Associates rolled over part of its stake to take an equal stake to Hg, while management and AlpInvest also rolled over as minority shareholders alongside Hg and TA.
The investment builds on Hg’s prior experience in SME, accounting and tax as well as HR and payroll software. Hg has made multiple investments in this space already and Access demonstrates many of the characteristics that Hg looks for in an investment including business-critical software, a growing base of loyal customers, a strong management team and M&A potential.
Market background
Access launched Access Workspace during FY18, a new platform designed to integrate business software in one place and provide a holistic view of business performance and data analytics.
Acquisitions are critical to Access’s future growth strategy and it intends to look for innovative companies that can extend its offering into new sectors and industries. By way of example, the recent acquisitions of Unicorn and Riliance together make Access the UK leader for online training, compliance and risk management in the financial and legal sectors as well as extending its digital learning capabilities. Recent acquisitions in the hospitality sector in 2018 (Designmynight, ProNett and Procure Wizard) mean that Access can offer online booking, ticketing and event management software, as well as P2P, supply chain management, time and attendance solutions. These acquisitions have established the hospitality sector as Access’s second largest sector.
Competitors include Advanced Business Solutions and FinancialForce as well as other niche service providers.
Hg brings sector insight and finance
Following completion of its investment, Hg has supported multiple workstreams including M&A (acquisitions have included Riliance, Unicorn, Eazy Collect, Volcanic, Rapidata, iCareHealth, Microdec and Conquest); evaluating the basis for the transition of the business to a fully SaaS and subscription sales model; and exploring a data analytics project and sales incentive refresh to support the company’s cross-selling efforts.
The top priorities for the board and management team include integration of recent acquisitions; acceleration of the pace of transition to subscription sales; building capabilities acquired through recent M&A; successfully launching the Workspace user interface across multiple products; delivering growth in bookings in accordance with management’s plan; and continuing M&A execution.
Another year of strong trading in 2018
Access is trading well and reported significant year-on-year growth in FY18, with turnover rising 42% from £101.1m to £143.1m and EBITDA growing 71% from £27.9m to £47.6m year on year. This growth was fuelled by a combination of strategic acquisitions and 13% organic growth, with recurring revenue making up 70% of total revenue.
Although this is a new investment to Hg’s portfolio, strong trading has led to a £4.9m increase in the company’s valuation of its stake by from £30.5m in 2018 to £35.4m. Access generated a gross IRR in 2018 of 33%.
CogitalGroup: Business support, BPO, accounting and advisory
Exhibit 28: CogitalGroup investment summary
Investment |
Fund |
Sector |
Location |
Year of (latest) investment |
Unrealised value (£'000) |
Value (% of NAV) |
CogitalGroup |
Hg Genesis7/ HGT |
Services |
UK |
2016 |
33,090 |
4.20% |
Source: HgCapital Trust (data at 30 April 2019), Edison Investment Research
CogitalGroup was launched in December 2016 through the acquisition and merger of Nordic-based Azets (formerly Visma BPO) and UK-based firms Baldwins and Blick Rothenberg. The group’s focus is on providing BPO and advisory services to entrepreneurial businesses, their owners and managers and provide private clients with tax, compliance and reporting services.
In total, CogitalGroup now has c 90,000 customers with more than 6,000 employees operating from 177 offices in the UK, Norway, Sweden, Denmark and Finland and 700 employees based in Romania (nearshoring) and Lithuania (software development).
Company background
The group’s strategic goal is to become a leading, technology-led international business services group focused on the entrepreneurial and private company segments.
In July 2018, CogitalGroup acquired the regional accountancy firm, Wilkins Kennedy (£54m turnover, 700 employees and partners, 18 offices across London and the South East), one of the largest practices in the Home Counties. Including this acquisition, CogitalGroup had £453m revenues FY18 (approximately 50/50 between the UK and Nordics) and EBITDA of £68m.
Revenue is split across five divisions: BPO and outsourced services (49%), payroll and HR (18%), IT-related services (15%), consulting (11%) and audit (7%).
A ‘sweet-spot’ investment
Cogital continues Hg’s record of investing in regulatory-driven businesses in Hg’s ‘sweet spot’. Hg has been tracking the SME accountancy and advisory services sector for many years as it exhibits several attractive criteria including a high share of repeatable revenue due to the business-critical nature of the services; high retention rates due to the trusted nature of the adviser relationship; its breadth of customer base; fragmented competitive landscapes allowing for significant M&A opportunities; and an opportunity for margin improvement driven by the increased use of technology, nearshoring and scale.
Hg is principally focused on three valuation-creation levers at Cogital: driving organic growth across the group; pursuing the acquisitions of small accounting, tax and payroll offices; and improving EBITDA margins through technology and nearshoring.
Organic growth supplemented by M&A
Since Hg invested in December 2016, CogitalGroup has completed over 45 acquisitions, refinanced the business to ensure headroom for future M&A and rolled out a group-wide incentive scheme.
Over this time, it has seen a more than 60% increase in its sales and profits and CogitalGroup continues to trade in line with expectations, with strong double-digit revenue and EBITDA growth over 2018. Hg anticipates a 29% revenue CAGR (2017–19) and a 32% EBITDA CAGR. This strong performance has led to a 14% increase in the valuation of Hg’s stake since 2018, from £29.0m to £33.0m and a gross investment multiple of 1.6x at December 2018, representing a 24% gross IRR.
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General disclaimer and copyright This report has been commissioned by Hg Capital and prepared and issued by Edison, in consideration of a fee payable by Hg Capital. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services. Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note. No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors. Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest. Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.
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Frankfurt +49 (0)69 78 8076 960 Schumannstrasse 34b 60325 Frankfurt Germany |
London +44 (0)20 3077 5700 280 High Holborn London, WC1V 7EE United Kingdom |
New York +1 646 653 7026 1,185 Avenue of the Americas 3rd Floor, New York, NY 10036 United States of America |
Sydney +61 (0)2 8249 8342 Level 4, Office 1205 95 Pitt Street, Sydney NSW 2000, Australia |
Frankfurt +49 (0)69 78 8076 960 Schumannstrasse 34b 60325 Frankfurt Germany |
London +44 (0)20 3077 5700 280 High Holborn London, WC1V 7EE United Kingdom |
New York +1 646 653 7026 1,185 Avenue of the Americas 3rd Floor, New York, NY 10036 United States of America |
Sydney +61 (0)2 8249 8342 Level 4, Office 1205 95 Pitt Street, Sydney NSW 2000, Australia |
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