HgCapital Trust: Strong performance from a portfolio of unlisted tech companies

The private equity specialist HgCapital Trust has just released another excellent set of results and looks well-placed to continue to deliver double-digit annual growth.  

HgCapital Trust (LON:HGT) is a £965m listed private equity fund that invests in a portfolio of unlisted companies where it believes that it can add value. It has built up an excellent track record and has sailed through the pandemic thanks to the business-critical nature of the software firms that it typically targets.

In its interim accounts for the first six months of the year the fund achieved an impressive NAV total return of 6.6% compared to a fall of 17.5% in the FTSE All-Share. The subsequent two months to the end of August was a busy period for realisations with the year-to-date return increasing to 12%.

Its longer term track record is even more impressive. Over the last 20 years, the trust has achieved annualised NAV growth of 16% per annum (without dividend reinvestment) versus just six percent per annum for the FTSE All-Share.

Quality growth portfolio

HGT concentrates on unlisted companies that sell business-critical and non-discretionary software and services to their clients. These sorts of holdings typically benefit from having highly predictable business models and high levels of strong, recurring revenue. If the fund’s software investments were listed as a single group it would be one of the largest and fastest growing software companies in Europe with total sales of over £4.5bn.

There is no doubt that the pandemic has created a tough economic environment, yet HGT’s portfolio has continued to perform well. Its 20 largest companies that make up almost 90% of the value of the assets grew their earnings by 27% in the first six months of the year, which was faster than their sales growth of 23% due to the increase in profitability.

The investments are primarily focused in software and service businesses in specific end market ‘clusters’ in areas such as tax & accounting, ERP & payroll and legal & compliance. These unlisted companies mainly operate in the UK or Northern Europe and typically provide opportunities for strategic and operational improvement.

Favourable outlook

The analysts at Numis believe that the scale of the opportunities available to the various holdings means that the fund is well positioned to continue to deliver double-digit NAV returns over the long term.

Assuming that there is no further fundamental shift in the operating environment, the board expects to be able to achieve modest dividend growth in 2020 with a total dividend per share of five pence, which based on the latest price of 282p would be equivalent to a prospective yield of 1.8%.

Numis estimate that the NAV as of last Friday was 288.4p, which leaves the shares trading on a small two percent discount. They believe that this represents an attractive entry point for the fund, which remains their core long-term recommendation in the listed Private Equity sector.

Last week we saw some of the froth come off the large listed tech stocks and if this trend continues it might conceivably affect the realisation values, although HGT operates in very distinct areas that I would expect to be pretty resilient.