HgCapital Trust (HGT) has reported its annual results for the year ending 31 December 2022.
- Over the 12 month period HGT reported a NAV total return of 5.4%, though it also reported a share price total return of -15.1%.
- £527m was invested alongside Hg, the managing firm, including seven new portfolio companies.
- £404m returned to HGT, including three full realisations at an average multiple of 3.9x invested cost, and at an average uplift of 28% to December 2021 reported NAV.
- HGT reported a revenue and EBITDA growth of 30% and 25% respectively across the top 20 investments (representing 77% of its portfolio).
- The board agreed a 440m increase in HGT’s revolving credit facility, now totalling £290m
- £12m of new equity raised via tap issuance, and £1.4m share buyback over 2022.
- HGT will pay a full year dividend of 7.0p per share, in line with the prior year’s
HGT’s Chairman, Jim Strang, commented:
“The HGT portfolio is made up of 48 individual companies, spread across eight end-market ‘clusters’ which are well known to Hg. These investments operate across the B2B software and technology-enabled business services sectors. As part of the long-standing investment strategy adopted by Hg, these companies typically benefit from sector leading market positions and have highly resilient and defensive business models with loyal customers and high rates of recurring revenues. The portfolio has continued to deliver strong operating performance in the last year, despite the many and obvious challenges presented in the broader global economy. Looking forward, the environment seems set to remain challenging, however the investment model adopted by HGT and the strength of the portfolio augurs well for its continued successful development.”
HGT’s managers also commented:
“As we move into 2023, the focus shifts to earnings where we are seeing a heightened level of downgrades to expectations from public companies. Although currency (specifically the strength of the USD) is an important factor in this, the broader backdrop is less benign than prior years, and we expect to see some pressure on sales to new customers who may be more reluctant to commit to new software and services solutions. Within our portfolio, such new business revenue is a small proportion of the total; the overwhelming majority of our portfolio companies can deliver revenue growth from the existing customer base alone, via cross-sell and up-sell. The impact across the industry, and our portfolio, from 2022’s price increases (which may not take full effect until 2023), also helps to moderate any pressure from delayed new customer wins. These price increases across the sector result from a combination of ongoing long-term product innovation, and the greater value for customers of utilising software solutions in a constrained labour market (especially for higher-cost ‘white collar’ labour). This provides strong support for our ongoing view that inflation will have only a muted long-term impact on Hg investments.
A clear positive from all this is that as earnings reassert their dominance in valuation, we return to an environment where the operating performance of our portfolio once again becomes the main driver of value creation. We believe that the structural drivers of growth in our sector are, if anything, enhanced by the macro-economic shifts we see, as companies invest in technology in order to help offset wage and cost inflation. “