HgCapital Trust plc Regulatory News (HGT)

HgCapital Trust plc

ANNUAL Results for the YEAR ended 31 DECEMBER 2019

London, 9 March 2020: HgCapital Trust plc ("HGT"), which provides investors with a listed vehicle that invests primarily in unquoted software and service businesses, across Europe, managed by Hg, today announces its annual results for the year ended 31 December 2019.

The objective of HGT is to provide shareholders with consistent long‑term returns in excess of the FTSE All‑Share Index by investing predominantly in unquoted companies where value can be created through strategic and operational change.

CONTINUED Strong NAV performance PRIMARILY driven by ROBUST double-digit revenue and EARNINGS growth

SUMMARY performance

1 Total return assumes reinvestment of all historic dividendsNote: All figures have been adjusted for the 10:1 share-split in May 2019Source: Hg, Factset

KEY HIGHLIGHTS 2019

¡ Net assets of more than £1 billion, with continued outperformance of the FTSE All-share over one, three, five, ten and twenty-year periods

- Share price total return of 47.5% to 31 December 2019.

- NAV per share of £2.55, a total return of 20.8%.

- Proposed final dividend of 3 pence per share (full year dividend of 4.8 pence per share).

- An investment of £1,000 twenty years ago would now be worth £15,516, a total return of 1,452%. An equivalent investment in the FTSE All-Share Index would be worth £2,569

¡ Strong growth from the realised and unrealised portfolio

- Revenue and EBITDA growth of 24% and 35% respectively across the top 20 investments (92% of the portfolio) over the last twelve months.

- £117 million of cash returned to HGT through realisations at uplifts to book value and refinancings.

- Valuation multiple (EV/EBITDA) of 19.8x and net debt to EBITDA ratio of 6.2x for the top 20 investments.

¡ Continued investment and commitments to drive future value

- £117 million invested on behalf of HGT into companies that the Manager has known for many years.

- New commitment to Hg Saturn 2 of $400 million announced, which will be deployed over the next four to five years.

¡ Increased focus on liquidity, more regular and transparent reporting

- First placing of new shares for nine years, at a premium to NAV, raising £75 million (after all expenses) of equity over 2019. This will be used to fund future commitments to Hg funds and further co-investment in Hg portfolio companies.

- Introduction of quarterly valuations to improve market transparency.

- Ten for one share-split in May 2019 to help increase share liquidity.

¡ Roger Mountford will step down as Chairman and will be succeeded by Jim Strang

- Jim Strang will be appointed as Chairman with effect from the end of the AGM, after he is re-elected as a Director.

- The process of selecting a Chairman was led by Anne West, Senior Independent Director.

- A recruitment process to fill the vacancy created by the Chairman's retirement is under way.

POST PERIOD EVENTS AS AT 29 FEBRUARY 2020

¡ NAV per share of £2.55.

¡ Share price of £2.39, year-to-date performance of -7.2%.

¡ Pro-forma liquid resources post-completion of all announced transactions and the proposed dividend payable in May 2020, are £82 million (8% of 29 February NAV).

¡ Pro-forma outstanding commitments of £536 million (52% of 29 February NAV). We expect these to be drawn down over the next four to five years.

THE MANAGER'S Outlook

§ A very strong year of performance for HGT with the portfolio seeing consistent double-digit growth.

§ Hg continues to invest in "sweet-spot" businesses in eight end-markets, or "clusters", where it has many years' knowledge.

§ A focus on operational improvement continues to drive performance and deliver significant network benefits.

§ Further liquidity events expected over the next twelve months through both exits and refinancings.

§ Robust double-digit trading performance underpins confidence in the ongoing growth of a strong portfolio.

Strong earnings, realisations at uplifts to book value and supporting the management teams of the underlying portfolio businesses will continue to drive value for shareholders in HGT.

s

Roger Mountford, Chairman of HGT, commented:

"2019 not only saw excellent results but was a transformational year for HGT. I remain confident that, thanks to the skill and resources of Hg, the outstanding performance HGT has delivered will continue under Jim Strang."

- Ends -

The Company's 2019 Annual Report and a video from the Manager to accompany the results are available to view at: http://www.hgcapitaltrust.com/.

For further details:

About HgCapital Trust plc

HgCapital Trust plc is an investment company whose shares are listed on the London Stock Exchange (HGT.L). HGT gives investors exposure, through a liquid vehicle, to a portfolio of high-growth unquoted companies, managed by Hg, an experienced and well-resourced private equity firm with a long-term track record of delivering superior risk-adjusted returns for its investors.

For further details, see www.hgcapitaltrust.com and www.hgcapital.com

HgCapital Trust plc

Annual report and accounts - 31 December 2019

The objective of HgCapital Trust ('HGT') is to provide shareholders with consistent long‑term returns in excess of the FTSE All‑Share Index by investing predominantly in unquoted companies where value can be created through strategic and operational change.

HGT provides investors with exposure to a fast‑growing network of unquoted investments, primarily in software and service businesses across Europe.

References in this Annual Report and Accounts to HgCapital Trust plc have been abbreviated to 'HgCapital Trust' or 'HGT'.Hg refers to the trading name of Hg Pooled Management Limited and HgCapital LLP.Hg Pooled Management Limited is the 'Manager'.

References in this Annual Report and Accounts to 'Total Return' refer to a return where it is assumed that an investor has re‑invested all historic dividends at the time when they were paid.

References in this Annual Report and Accounts to pounds sterling have been abbreviated to 'sterling'.

Financial highlights

Annualised share price total return over the last 20 years: +14.7%

2019 performance:

______________________________________________________________________________________________________

Share price

at 31 December 2019 was 257.5p a total return for the year of:

+47.5%

(2018: +3.5%)

______________________________________________________________________________________________________

Market capitalisation

The market capitalisation of HGT at 31 December 2019 was:

£1.05bn

(2018: £666m)

______________________________________________________________________________________________________

NAV per share

at 31 December 2019 was 255.1p a total return for the year of:

+20.8%

(2018: +14.3%)

Please refer to Note 10(b) in the full Annual Report and Accounts for further detail on calculation of NAV per share

______________________________________________________________________________________________________

Net assets

The total NAV of HGT at 31 December 2019 was:

£1.04bn

(2018: £805m)

______________________________________________________________________________________________________

Full-year dividend

4.8p

(2018: 4.6p)

______________________________________________________________________________________________________

Total ongoing charges

The total ongoing charges for the year to 31 December 2019:

1.6%

(2018: 1.9%)

Please refer to page 110 in the full Annual Report and Accounts for further detail on the calculation of ongoing charges.

______________________________________________________________________________________________________

Top 20 investments as at 31 December 2019:

_____________________________________________________________________________________________________

LTM sales growth

+24%

(31 Dec 2018: +25%)

_____________________________________________________________________________________________________

LTM profit growth

+35%

(31 Dec 2018: +27%)

_____________________________________________________________________________________________________

EV to EBITDA multiple

19.8X

(31 Dec 2018: 17.3x)

_____________________________________________________________________________________________________

Net Debt to EBITDA ratio

6.2X

(31 Dec 2018: 5.6x)

_____________________________________________________________________________________________________

These figures are calculated on a value‑weighted basis. For further information on the top 20 portfolio trading performance and valuation and net debt analysis, please refer to Hg's review below (and on pages 42 to 43 of the full Annual Report and Accounts).

Balance sheet analysis as at 31 December 2019:

_____________________________________________________________________________________________________

Liquid resources(18% of NAV)

£189m

In addition, HGT has an undrawn bank facility of £80 million. 

_____________________________________________________________________________________________________

Outstanding commitments(32% of NAV)

£336m

These commitments will be drawn down over the next 12 months and are likely to be partly financed by cash from future realisations. Future commitments are likely to be drawn over a period of four to five years (2020 - 2025).

HGT can opt out of a new investment without penalty, should it not have the cash available to invest. 

_____________________________________________________________________________________________________

An active pipeline of investment opportunities led to new and follow-on investments, whilst returning cash to HGT through both realisations and refinancings.

Investment and realisation activity in 2019:

_____________________________________________________________________________________________________

Realisations for the benefit of HGT

£117m

_____________________________________________________________________________________________________

Cash invested on behalf of HGT

£117m

_____________________________________________________________________________________________________

For further information on investment and realisation activity over the year, please refer to sections below and pages 46 to 50 in the full Annual Report and Accounts.

Historical total return performance

Both HGT's share price and net asset value per share have continued to outperform the FTSE All‑Share Index.

*Please refer to Note 10(b) on page 90 of the full Annual Report and Accounts for further detail on the calculation of NAV per share.

Based on HGT's share price at 31 December 2019 and allowing for all historic dividends being reinvested, an investment of £1,000 made twenty years ago would now be worth £15,516, a total return of 1,452%. An equivalent investment in the FTSE All-Share Index would be worth £2,569.

Ten year dividend record

Chairman's statement

"2019 not only saw excellent results but was a transformational year for HGT"

Roger Mountford, Chairman, HgCapital Trust plc

Dear Shareholder

I am very pleased to report that 2019 not only saw excellent results but was a transformational year for HGT. Highlights included:

• Having been admitted to the FTSE 250 in October 2018, HGT consolidated its position in the Index, with market capitalisation increasing from £666 million at December 2018 to over £1 billion in December 2019.

• Introduction of quarterly valuations as a further step in giving the market transparency to support active trading in our shares.

• A 10-for-1 share split, reflecting the enormous growth in net asset value per share over the last decade, resulting in a more liquid market in our shares.

• Our first placing of new shares for nine years, at a premium to NAV, with a number of new institutional shareholders joining HGT's register.

• A series of tap issues of new shares providing more opportunities for investors to add to their holdings, increasing the amount raised from new equity to £75m.

Performance

HGT's net asset value increased to 255.1 pence per share at year end (2018: 215.7 pence, adjusted for the share split), an increase on a total return basis of 20.8% over the year.

More than 75% of the increase in value of unrealised investments arose from increases in profits rather than valuation multiples. This impressive result would have been even stronger but for volatility in the value of sterling which led to a 4% reduction in net asset value.

Following the increase in interim dividend from 1.6 pence to 1.8 pence per share, the Board is recommending a final dividend of 3.0 pence, making a total of 4.8 pence per share. We are also revising our guidance and we anticipate total dividends in future years to be not less than 4.8 pence per share.

Our share price recovered quickly from the market's nervous period in late 2018, reaching a price of 257.5 pence at year-end (2018: 178.5 pence, adjusted for the share split).

This represented a total return to shareholders in the year of 47.5%, out-performing the FTSE All-Share Index by 28.3%. More importantly, we sustained our long-term record of out-performance of the wider market, at more than 15% p.a. over the last three and five years. Over the last twenty years our share price total return has been 14.7% p.a., out‑performing the All-Share Index by close to 10% p.a.

This long‑term record was recognised by the Association of Investment Companies, which marked the twentieth anniversary of ISAs by identifying the investment trusts that delivered the highest returns to investors who subscribed to an ISA over that period. HGT delivered a return that put it well into the top ten UK listed investments. We anticipate that an up to date calculation will be published soon, reconfirming HGT's record as one of the most rewarding long-term investment opportunities for regular savers.

I am pleased also to report that HGT was awarded Investment Company of the Year by Investment Week in the private equity and growth capital sector. This is the ninth time that HGT has been selected for this award. It reflects, I believe, not only another outstanding year's return but also the consistency of returns we have delivered and the quality and transparency of our reporting to investors. The citation described HGT as "the Gold Standard of private equity Investment Trusts".

Realisations

Following a period of 2 years in which Hg sold a total of 19 investments, this was a relatively quiet year for realisations; two businesses were sold: Foundry and Register, achieving multiples of cost of 2.1x and 4.2x respectively. Cash proceeds were also received from the refinancing of several businesses we continue to hold. We also realised our interest in one of two legacy renewables funds. In total, we received proceeds of £117 million.

Investments

This annual report goes further than before in describing the investment strategy of our manager, Hg. Their approach is to invest primarily in two market sectors-software and services-and in eight "clusters" based on the end-market users of the software or services. This degree of focus enables Hg to identify large numbers of opportunities, track them often for years, make highly informed investments, and have a repeatable and iterative strategy for value enhancement based on prior experience with comparable businesses.

Hg's emphasis is on teamwork among its 120 investment and portfolio management professionals. Investments are not the personal choice of individual fund managers. Every investment must be supported by Hg's investment committee and their large deal teams are composed of experienced investors from across the firm and its London, Munich and New York offices. Moreover, Hg has built a 30-strong Portfolio Team comprising experienced senior managers from industry and specialised business analysts; their role is to support the development of transformational strategies for each business we acquire and to give hands-on assistance to the business in implementing strategic and operational change. This work not only enhances revenue growth and profitability but also, in recognition of the enhanced sustainability of the business, leads to higher multiples being achieved when we sell. In certain cases where a business continues to have opportunities to grow strongly, whether organically or by acquisition, or improve margins, we are happy to remain invested over a longer period than often observed in the private equity market; for example, we have been invested in IRIS since 2004 and Visma since 2006.

Having successfully adopted cloud-based software across much of the portfolio, Hg is now an early mover in applying other new technologies that the digital revolution is bringing forward. Notable among these are Artificial Intelligence and Machine Learning; a description of this investment opportunity and case studies, are set out below (or on pages 36 to 38 in the full Annual Report and Accounts).

Hg's scale enables collaboration across the portfolio, ensuring that best practice and past experience are shared among the managers of the 30-odd businesses in which we are invested. Sections below (or pages 28 and 29 in the full Annual Report and Accounts) describe how Hg has created an online community for its management teams and regularly brings them together to encourage informal co-operation and mutual support.

During the year, we invested £117 million in three new investments, Transporeon, Litera, team.blue and a follow-on in Lyniate (formerly known as Rhapsody)-one in each of four clusters in which Hg has been investing for between five and fifteen years. In addition, we made a further investment in Visma, a core holding within another cluster where Hg has acquired enormous depth of expertise over a long period.

New commitments

Shareholders will be familiar with the commitment-investment-realisation cycle that underpins our business. Every four years or so HGT and Hg's other institutional clients make commitments to invest in a "vintage" of new opportunities over the following four to five years. HGT thereby enables private investors, wealth managers and smaller institutions to invest alongside the world's largest institutional investors in businesses that would otherwise be inaccessible to our investors-and to do so on identical terms but with the added advantages of a listed investment vehicle and the corporate governance framework and transparency of an investment trust.

We are now in discussion with Hg about making new commitments to invest in parallel with their new Hg Saturn 2, Hg Genesis 9 and Hg Mercury 3 funds. Our first new commitment is to invest $400 million in Hg Saturn 2, a fund designated in US dollars and designed to make large acquisitions. We expect Hg Saturn 2 will make around 8-10 investments in total, with HGT investing around $40-50 million in each holding. Further commitments to invest in Hg Genesis 9 and Hg Mercury 3, consistent with our long-term strategy, will be agreed in the coming weeks. In all cases, we will continue to have the benefit of an "opt-out" from our commitment to invest in any new investment if we do not have sufficient funds available.

Co-investment

The Board actively manages HGT's balance sheet in order to keep it well invested but without taking unacceptable risk.

In addition to our commitments to Hg's vintages, we have also agreed to a programme of co-investments in businesses held by Hg, in addition to our core holdings. The Board and the Manager have agreed to aim to have co-investments represent 10 to 15% of HGT's NAV, even as our NAV continues to grow in coming years.

Currently, co-investments are valued at £143 million, representing 14% of NAV as at 31 December 2019 - and we have agreed three further co‑investments, totalling an estimated £19 million, in Argus Media, P&I and smartTrade since the period end.

All our co-investments are free of management fees, reducing the ongoing charges and free of carried interest.

Responsible investment

The Board fully understands and endorses the increasing emphasis on responsible investment that wider society, and investors, expect listed companies of all kinds to respect.

In particular, we understand the need to ensure that the businesses we invest in reduce their carbon footprint and contribute to tackling climate change. The sectors in which we invest are unlikely to raise ethical issues and are not in themselves large sources of carbon emission. However, the technologies within our software businesses can assist other types of business to make progress, as described in a case study below (or on page 35 in the full Annual Report and Accounts).

During 2019, Hg itself was independently certified as a Carbon-Neutral Company. I am pleased to report that the assessment by UNPRI of Hg's approach to responsible investment increased from AA to AA++ during the year.

Corporate governance

Our reporting on corporate governance is further expanded this year. In particular, below we set out a full report on how we meet the duties placed on directors under Section 172 of the Companies Act. I am confident that we have always properly undertaken our duties to shareholders and other stakeholders, considered our impact on the community and environment, and taken a long-term approach to the management of HGT. This new report brings together in one place our beliefs, values and actions.

We are also committed to follow the AIC Code of Corporate Governance and an expanded report on our compliance is set out on pages 115 to 118 in the full Annual Report and Accounts.

During 2019 we agreed new policies on Board composition and tenure and on maintaining the culture of HGT.

These policies are linked because it is important that we maintain a culture of informed challenge and open debate by ensuring that the Board has the right balance of experience and fresh thinking. Our policy is to seek to recruit a new director every two years or so, which is likely to result in an average tenure of around six years, but we do not set a maximum tenure as this could lead to the loss of valuable corporate knowledge.

In 2018 we recruited two new non-executive directors to the Board. In 2019 the Board agreed a set of interlocking processes that will lead to a further refreshing of the Board in 2020. I indicated in our Interim Report that I intended to stand down as Chairman in 2020. Accordingly, the Board's Nomination Committee, led by Anne West, the Senior Independent Director, took responsibility for the selection of a new Chair; her report on this process appears on page 124 in the full Annual Report and Accounts.

I am delighted to report that Jim Strang, who will stand for re-election as a Director at the forthcoming AGM, will be appointed as my successor.

Simultaneously, we began a review of the effectiveness of the Board and its committees so that the conclusions would be available as I hand over to my successor, giving the incoming Chair an up-to-date and Independent analysis of the strengths and weaknesses of the Board and identifying options for change; this effectiveness review was externally facilitated by Trusted Advisor Partnership, a specialist in this field. Thirdly, my retirement from the Board creates a vacancy for a new director. The role profile and skill set we seek are informed by insights from the effectiveness review. Following the successful recruitment of two directors in 2018, the Board has again retained nurole.com, an online and active recruitment specialist, to conduct this search. Once again, we have given clear instructions that they should to bring forward a diverse range of candidates. The selection process is being led by our Senior Independent Director and my successor as Chairman and I am pleased to report that, at the time of writing, we have a long list of 12 qualified candidates, well balanced between women and men.

As a further element in our framework of good corporate governance, at this year's AGM we will propose a resolution extending the life of HGT by a further five years, matching the investment period of the current range of funds to which we are making commitments. The Board has confidence in the continuing opportunity that HGT offers to investors and we recommend this resolution to shareholders for their support.

______________________________________________________________________________________________________ 

"I remain confident that, thanks to the skill and resources of Hg, the outstanding performance HGT has delivered throughout my period of service will continue."

Roger Mountford, Chairman, HgCapital Trust plc

______________________________________________________________________________________________________

Risks and prospects

During 2019, we have carefully reviewed our risk management framework, which we have strengthened to include an integrated view of investment, financial, operational and external risks. Through this framework the Board is able to ensure that HGT's portfolio of investments are aligned to our risk appetite, and predictive and preventative steps can be taken where necessary. This risk management framework is an important element of the culture of the Board and the relationship with the Manager.

At each meeting of the Board we receive detailed trading information and reports on every business in our portfolio. Recent reports have shown that, almost without exception, the investments we hold are growing and trading well; in 2019 the top 20, representing 92% of our portfolio, reported aggregate revenues of £4.0 billion, EBITDA of £1.2 billion and an EBITDA margin of 29%, compared with 27% in 2018. With revenues growing by 24% p.a. overall, these figures evidence the quality of our portfolio and the effectiveness of Hg's processes.

It is, of course, too early to know the future trading relationship between the UK and the EU, but as Hg and the Board have said before, the businesses we own undertake little cross-border trading and are therefore not greatly exposed to any new friction in trade. We have some exposure to volatility in exchange rates and have taken action to adopt a more sophisticated approach to managing currency risk. At the time of writing, it is impossible to forecast the scale and severity of the coronavirus epidemic in China and elsewhere, or the impact it will have on supply chains to the global manufacturing sector and thereby on the global economy and capital markets. As we have no direct exposure to the manufacturing or retail sectors, any effects on our portfolio would be indirect, via levels of corporate investment in software or valuation multiples. The automotive cluster is clearly the most exposed to supply chain disruption for the OEMs and Hg is monitoring this cluster especially closely.

As I prepare to step down at the forthcoming annual general meeting I remain confident that, thanks to the skill and resources of Hg, the outstanding performance HGT has delivered throughout my period of service will continue. I take this opportunity to thank all the partners and staff of Hg who have made such an impressive contribution to HGT's success, and to my fellow directors past and present for their wise counsel. My successor, Jim Strang, is uniquely well qualified to lead the Board of HGT in the next stage of its journey and I wish him and the Board and Hg continuing success.

Roger MountfordChairman6 March 2020

Investment objective and investment policy

The objective of HGT is to provide shareholders with consistent long‑term returns in excess of the FTSE All‑Share Index by investing predominantly in unquoted companies where value can be created through strategic and operational change.

Investment policyThe policy of HGT is to invest, directly or indirectly, in a portfolio of unlisted companies where Hg believes it can add value through increasing organic growth, generating operational improvements, driving margin expansion, reorganisation or by acquisition to achieve scale. HGT seeks to maximise its opportunities and reduce investment risk by holding a spread of businesses diversified by end-market and geography.

Risk managementHGT has adopted formal policies to control risk arising through excessive leverage or concentration. HGT's maximum exposure to unlisted investments is 100% of the gross assets of HGT from time to time. On investment, no investment in a single business will exceed a maximum of 20% of gross assets. HGT may invest in other listed closed‑ended investment funds up to a maximum at the time of investment of 15% of gross assets.

Sectors and marketsAs HGT's policy is to invest in businesses in which Hg can play an active role in supporting management, Hg primarily invests in companies whose operations are headquartered or substantially based in Europe. These companies operate in a range of countries, but there is no policy of making allocations to specific countries or markets. Investments are made across a range of sectors where Hg believes that its skills can add value, but there is no policy of making allocations to sectors.

HGT may, from time to time, invest directly in private equity funds managed by Hg where it is more economical and practical so to do.

LeverageEach underlying investment is usually leveraged but no more than its own cash flow can support, in order to enhance value creation; it is impractical to set a maximum for such gearing across the portfolio as a whole. HGT commits to invest in new opportunities in order to maintain the proportion of gross assets that are invested at any time, but monitors such commitments carefully against projected cash flows.

HGT has the power to borrow and to charge its assets as security. The Articles restrict HGT's ability (without shareholder approval) to borrow, to no more than twice HGT's share capital and reserves, allowing for the deduction of debit balances on any reserves.

HedgingPart of HGT's portfolio is located outside the UK, predominantly in Northern Europe, and a further part in businesses that operate in US dollars. HGT may therefore hold investments valued in currencies other than sterling. From time to time, HGT may put in place hedging arrangements with the objective of protecting the sterling translation of a valuation in another currency. Derivatives are also used to protect the sterling value of the cost of investment made or proceeds from realising investments in other currencies, between the exchange of contracts and the completion of a transaction.

Commitment StrategyHGT employs a commitment strategy to ensure that HGT's balance sheet is managed efficiently. The level of commitment is regularly reviewed by the Board and Hg.

Liquid fundsHGT maintains a level of liquidity to ensure, so far as can be forecast, that it can participate in all investments made by Hg throughout the investment‑realisation cycle.

At certain points in that cycle, HGT may hold substantial cash awaiting investment. HGT may invest its liquid funds in government or corporate debt securities, or in bank deposits, in each case with an investment grade rating, or in managed liquidity funds that hold investments of a similar quality.

If there is surplus capital and conditions for new investment appear to be unfavourable, the Board will consider returning capital to shareholders, probably through the market purchase of shares.

Any material change to HGT's investment objective and policy will be made only with the approval of shareholders in a general meeting.

Rationale and business model

The Board has a clear view of the rationale for investing in unquoted businesses where there is the potential for accelerating the growth in value through a private equity approach. This informs its decisions on the operation of HGT and the evolution of HGT's Business Model.

Rationale

The Board believes that there is a convincing rationale for directly investing in well‑researched private businesses where there is potential for substantial growth in value, especially where there is the ability to work with management to implement strategic or operational improvements.

By taking on the burdens of administration, monitoring and accounting that such investments require, HGT offers a simple and liquid means by which shareholders can achieve an investment in unquoted growth companies, monitored by a Board of independent Directors.

Business model

To achieve HGT's Investment Objective and within the limits set by the Investment Policy, HGT is an investor in unquoted businesses managed, and in most cases controlled, by the Manager. From time to time, HGT may hold listed securities in pursuit of its Investment Policy.

HGT is currently invested in more than 30 companies as set out below (and on page 52 in the full Annual Report and Accounts), ranging in size, sector and geography, providing diversification.

The Board has delegated the management of HGT's investments to Hg Pooled Management Limited (the 'Manager' or 'Hg'). Further details of the terms of the management agreement are set out on page 110 in the full Annual Report and Accounts. The Manager invests predominantly in unquoted software and service businesses in expanding sectors and provides portfolio management support. Hg's review below (and on pages 23 to 75 in the full Annual Report and Accounts) outlines how HGT's investments are managed on behalf of HGT.

Most of HGT's investments are held through special-purpose partnerships, of which it is the sole limited partner.

Periodically, HGT enters into a formal commitment to invest in businesses identified by the Manager, alongside institutional investors who invest in an Hg Limited Partnership Fund. Such commitments are normally drawn down over three to four years. The institutional investors and HGT invest on substantially identical terms.

HGT is usually the largest investor in each business. The Board has a further objective of keeping HGT as fully invested as is practical, while ensuring that it will have the necessary cash available when a new investment arises.

The Board, on the advice of the Manager, makes assumptions about the rate of deployment of funds into new investments and the timing and value of realisations. However, to mitigate the risk of being unable to fund any draw‑down under its commitments to invest, the Board has negotiated a right to opt out, without penalty, of its obligation to fund such draw‑downs where certain conditions exist.

HGT may also take up a co‑investment in some businesses (in addition to the investment it has committed to make).

HGT has no liability to pay fees on such co‑investment and no carried interest incentive is payable to the Manager on realisation (currently 14% of HGT's NAV is in co‑investments). HGT may also offer to acquire a limited partnership interest in any of Hg's funds, in the event that an institutional investor wishes to realise its partnership interest.

The Board regularly monitors progress in all the businesses in which it is invested, and their valuation; the development of the Manager's investment strategy; the resources and sustainability of the business model.

Investment trust statusAs HGT is constituted as an investment trust and its shares are listed on the London Stock Exchange, it can take advantage of tax benefits available to investment trusts. This allows HGT to realise businesses from its portfolio without liability to corporation tax. The Board intends to retain this status so long as it is in shareholders' interest to do so. This will require the Board to declare dividends so that not more than 15% of taxable income is retained each year.

Performance targetsHGT's aim is to achieve returns in excess of the FTSE All‑Share Index over the long‑term. To this end, the Board monitors the Key Performance Indicators, as set out above (or on pages 5 and 6 in the full Annual Report and Accounts). In the year to 31 December 2019, HGT's NAV per share increased by 20.8% on a total return basis. The FTSE All‑Share Index increased by 19.2% on a total return basis over the year. The twelve month total return of HGT's share price was 47.5%. NAV per share has grown by 13.4% p.a. compound over the last ten years and 13.1% p.a. compound over the last twenty years. The share price has seen broadly similar performance growing by 15.0% p.a. compound over the last ten years and 14.7% p.a. compound over the last twenty years.

All of the above returns assume the reinvestment of all historical dividends. The Board and the Manager aim to continue to achieve consistent, long‑term returns in this range.

HGT is not managed so as to reflect short‑term movements in any Index. The Board also regularly compares HGT's NAV and share price performance against a basket of broadly comparable companies with similar characteristics, listed on the London Stock Exchange.

DividendsIn 2017, the Board announced that it anticipated that future dividends would be no less than 4.6p (adjusted for the share split) per share and that these would be split between an interim distribution made in or around October, and a final distribution made in or around April.

We are also revising our guidance and we anticipate total dividends in future years to be not less than 4.8 pence per share.

Where possible, the Trust has elected to 'stream' its income from interest‑bearing investments as dividends for tax efficiency purposes. More details can be found on page 134 in the full Annual Report and Accounts.

Going concernHGT's business activities, together with the factors likely to affect its future development, performance and financial position are described in the Board's Strategic Report and Hg's Review. The financial position of HGT, its cash flows, liquidity and borrowing facilities are described in the Strategic Report.

In addition, Note 19 to the financial statements describes HGT's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk. The Directors have considered the FRC Guidance on Risk Management, Internal Control and Related Financial and Business Reporting and believe that HGT is well placed to manage its business risks successfully. The Directors review cash flow projections regularly, including important assumptions as to future realisations and the rate at which funds will be deployed into new investments. The Directors have a reasonable expectation that HGT will have adequate resources to continue in operational existence for at least the next twelve‑month period from the date of approval of this Report and be able to meet its outstanding commitments. Accordingly, they continue to adopt the going concern basis in preparing these results.

At this year's AGM the Board will propose a resolution to extend the life of HGT by a further five years, matching the investment period of the current range of funds to which HGT is making commitments. The Board has confidence in the continuing opportunity that HGT offers to investors and recommends this resolution to shareholders for their support.

Long‑term viability statement

In accordance with provision 31 of the 2018 revision of the UK Corporate Governance Code, the Directors have assessed the prospects of HGT over a longer period than the twelve months required by the 'Going Concern' test. The Board believes that the appropriate period over which to assess HGT's viability may vary from year to year, depending on a number of factors, notably its outstanding investment commitments, which at year end run until 2020‑2021. In addition, the Board believes that it should assess the viability of HGT over a minimum of five years and, accordingly, has elected this year to assess HGT's viability over the five‑year period ending December 2024.

The key assumption which underpins our strategic planning is that HGT's business model remains broadly unchanged and continues to focus on investing in unquoted businesses managed by Hg.

Assessment of prospectsThe Board has assessed HGT's prospects and long-term viability with due consideration to:

• HGT's position with reference to the business model (above and on pages 14 and 15 in the full Annual Report and Accounts);

• the balance sheet, cash flow projections and availability of funding (below and on pages 43 to 44, 78 and 94 in the full Annual Report and Accounts )

• HGT's contractual commitments (below and on page 44 in the full Annual Report and Accounts);

• the principal risks and uncertainties associated with HGT, including: performance; regulatory; operational; financial; liquidity; and borrowing, as detailed below (and on pages 16 and 17 of the Strategic Report in the full Annual Report and Accounts).

Sensitivity analysisThe Directors of HGT have looked at the sensitivity of the business model against principal risks likely to have an impact including:

• Insufficient funds to meet commitments;

• A downturn in the macro-economic environment; and

• The effect of Brexit on HGT and the portfolio companies.

Based on this assessment, the Directors of HGT confirm that they expect HGT will continue to operate and meet its liabilities, as they fall due, during the five years ending December 2024.

Principal and emerging risks and uncertainties

During 2019 the Audit and Valuation Committee ('AVC') has supported the Board in the creation of a strengthened Risk Management Framework, undertaking a robust assessment of the principal and emerging risks facing HGT.

Managing risk is fundamental to the delivery of HGT's strategy, and this framework provides the rigour to assess and manage these risks, the controls in place to mitigate them, including those that would threaten its business model, future performance, solvency, valuation, liquidity or reputation.

The Board has defined risk appetite statements for each of the risks faced during the course of business. By assessing the impact and likelihood of each risk against HGT's appetite, we ensure that focus is maintained on the risks that require most attention, and that mitigating actions are progressed.

This process involves the maintenance of a risk register, which identifies the risks facing HGT and assesses each risk and classifies the likelihood of the risk and the potential impact of each risk on HGT. The Board has established controls to mitigate against risk faced by HGT. The AVC regularly reviews the policies for managing each risk, as summarised below.

HGT considers its principal risks (as well as underlying risks) in four main categories:

Investment - the risk to HGT of an inappropriate investment strategy or Manager decisions leading to poor performance.

Financial - a range of risks that include valuation risk and liquidity risk ensuring the availability of sufficient liquid resources for HGT to meet its commitments.

Operational - the monitoring of regulation, Hg's internal controls systems and those of HGT's other service providers.

External - macro-economic conditions, foreign currency, availability of credit.

Environmental, Social and Governance Matters

Socially responsible investmentThe Board has endorsed Hg's policy to invest in a socially responsible manner, as set out below (and on pages 32 to 33 in the full Annual Report and Accounts) and on their website at www.hgcapital.com/responsibility. HGT's focus is on identifying high‑quality and sustainable businesses, and supporting their growth for the benefit of shareholders and wider society. The Board monitors investment activity to ensure they are compatible with these policies.

HGT has no employees and has limited direct impact on the environment. HGT aims to conduct itself responsibly, ethically and fairly and has sought to ensure that Hg's management of investments takes account of social, environmental and ethical factors where appropriate. The sectors in which the Manager invests do not generally raise material ethical issues.

Employees, human rights and community issuesThe Board recognises the requirement under section 414C of the Companies Act 2006 to provide information about employees, human rights and community issues, including information in respect of any policies it has in relation to these matters and their effectiveness. These requirements do not apply to HGT as it has no employees, all of the Directors are non‑executive and it has outsourced all its functions to third party providers. HGT has therefore not reported further in respect of these provisions.

Modern SlaveryHGT has no employees of its own. The Directors are satisfied that, to the best of their knowledge, Hg complies with the provisions of the UK Modern Slavery Act 2015. For further information please visit: https://hgcapital.com/wp-content/uploads/2019/10/ModernSlavery2019.pdf

DiversityAll financial decisions are made under conditions of uncertainty. The Board recognises the value of both identity and cognitive diversity in ensuring that varied perspectives are considered when making decisions.

The Board places value on attracting directors with diverse outlooks and experience. The skills and experience that the current members of the Board bring to HGT's leadership are described on pages 108 to 109 in the full Annual Report and Accounts . The Board's policy is to make appointments to the Board to achieve the balance of skills, outlook and experience needed and to do so solely on merit. At the end of the year under review, the Board of Directors of HGT comprised five men and one woman. HGT seeks to enhance diversity and looks for the best qualified male and female candidates. The Manager has an equal opportunities policy and currently employs 111 men and 81 women. Nic Humphries, Senior Partner, Hg, is a member of the Level 20 Advisory Council, a not‑for‑profit organisation that aims to inspire more women to join and succeed in the European private equity industry. Details of Hg's diversity and inclusion initiatives can be found below and on page 31 in the full Annual Report and Accounts.

Directors' duties

______________________________________________________________________________________________________

Section 172 of the Companies Act 2006Section 172 of the Companies Act 2006 (the 'Act') requires directors to act in good faith and in a way that is the most likely to promote the success of HGT. In doing so, directors must take into consideration the interests of the various stakeholders of HGT, the impact HGT has on the community and the environment, take a long-term view on consequences of the decisions they make, as well as aim to maintain a reputation for high standards of business conduct and fair treatment between the members of HGT.

______________________________________________________________________________________________________

Fulfilling this duty naturally supports HGT in achieving its Investment Objective and helps to ensure that all decisions are made in a responsible and sustainable way. In accordance with the requirements of the Companies (Miscellaneous Reporting) Regulations 2018, below, the Board explains how the Directors have individually and collectively discharged their duties under section 172 of the Act over the course of the reporting period.

To ensure that the Directors are aware of, and understand, their duties, they are provided with a tailored induction, including details of all relevant regulatory and legal duties as a Director of a UK public limited company when they first join the Board, and continue to receive regular and ongoing updates and training on relevant legislative and regulatory developments. They also have continued access to the advice and services of the Company Secretary and, when deemed necessary, the Directors can seek independent professional advice. The schedule of Matters Reserved for the Board, as well as the Terms of Reference of its committees are reviewed annually and further describe Directors' responsibilities and obligations and include any statutory and regulatory duties.

CultureDuring the year, the Directors also considered and defined HGT's culture and values and have worked to incorporate these behaviours and processes into the annual review of the Manager, strategic planning, the annual evaluation of Board effectiveness and reporting to stakeholders - thus embedding consideration of stakeholders' interests, long-term perspective, maintaining reputation for fairness and high standards of governance, corporate reporting and business conduct more generally in HGT's culture and processes.

Decision-makingThe importance of stakeholder considerations, in particular in the context of decision-making, is regularly brought to the Board's attention by the Company Secretary and taken into account at every Board meeting, and a paper reminding Directors of that is tabled at the start of every Board meeting. For example, the strategic planning discussions involve careful considerations of the longer-term consequences of any decisions and their implications on shareholders and other stakeholders, and are supported by detailed cash flow projections based on various scenarios, which include: assumptions around HGT's contractual commitments; availability of funding; borrowing; foreign currency management; as well as the wider economic conditions and market performance.

Community and EnvironmentThe Board recognises that HGT has a responsibility to its shareholders, stakeholders and wider society. The Board endorses Hg's policy to invest HGT's funds in a socially responsible manner. This includes the desire that the businesses Hg invests in are genuinely focused on making a positive contribution to all stakeholders including employees, customers, suppliers, shareholders and the wider society. Responsible investing also means investing in growth companies and sectors, rather than turnaround or distressed investing. Hg has been a signatory of the UN Principles for Responsible Investment ('UNPRI') since 2012 and the Board has welcomed Hg's continuing commitment to set ambitious goals for various aspects of environmental, social, and governance ('ESG') matters. Further details on how Hg integrates responsible investing into the investment process can be found below (or on page 32 in the full Annual Report and Accounts).

The Board and Hg also recognise the impact climate change has on the environment and society. The Manager is committed to measuring and managing the carbon emissions associated with its business operations, although a large part of Hg's impact is generated by the portfolio companies. Hg therefore continues to work with them to raise awareness on climate change risks, carbon emission and energy efficiency. Hg is a certified Carbon Neutral company, committing to zero emissions by offsetting its entire carbon footprint.

The Board monitors investment activity to ensure it is compatible with the policy and receives periodic updates from the Manager on its initiatives and performance against its ESG goals. The Hg Responsible Investment Report 2018, Hg Responsible Investment Policy 2019 and Hg 2019 Carbon Footprint Report can be found on Hg's website: https://hgcapital.com/responsibility/

Business ConductHGT aims to conduct itself responsibly, ethically and fairly and has sought to ensure that Hg's management of investments takes account of social, environmental and ethical factors where appropriate. As described below (or on page 22 in the full Annual Report and Accounts), in 2019 the Directors considered HGT's purpose and values and defined the Board's culture, the desired elements of it and ways to assess and monitor them. The Directors agree that establishing and maintaining a healthy corporate culture in amongst the Board and in its interaction with the Manager, shareholders and other stakeholders will support the delivery of its purpose, values and strategy.

The Matters Reserved for the Board, Board committees' terms of reference, the Share Dealing and other Board policies are all reviewed on at least an annual basis, and the Directors ensure that they appropriately define obligations and correct procedures.

The Report of the Audit & Valuation Committee, which can be found on pages 119 to 121 in the full Annual Report and Accounts, further explains how the Committee reviews the risk management and internal controls of HGT. This includes reasonably satisfying itself that relevant systems and controls in place remain effective and appropriate, that the Manager sets an appropriate 'control culture', and that Hg's whistleblowing procedures, Anti‑Bribery and Anti-Corruption policies are in place. Hg's Compliance Manager attends meetings to attest to the Board how Hg complies with these polices.

StakeholdersThe Board seeks to understand the needs and priorities of HGT's stakeholders and these are taken into account during all of its discussions and as part of its decision-making. While as an externally managed investment firm HGT does not have any employees or customers, the Board recognises its key stakeholders and the Board's beliefs and actions in relation to each group of stakeholders are described in the table below:

1The FRC's review was based solely on HGT's 2018 Annual Report and Accounts and did not benefit from detailed knowledge of HGT's business or an understanding of the underlying transactions entered into.

CultureDuring 2019, the Directors considered and defined HGT's culture, purpose and values. By formally identifying the important elements of HGT's culture, the Directors are able to assess and monitor it and ensure that it remains well aligned with HGT's purpose, values and strategy.

The culture of an externally managed investment trust is the product of the Board's diversity and behaviours, the values and behaviours of the Manager, and the way in which the Board and the Manager interact with each other and with stakeholders' of HGT.

Purpose, value and strategyThe Purpose of HGT is to deliver to shareholders consistent long-term returns in excess of the FTSE All-Share Index by investing predominantly in unquoted companies where value can be created through strategic and operational change. Through its Manager, HGT provides shareholders with exposure to a fast-growing network of unquoted investments, primarily in European software and service businesses. In providing access to investments not otherwise usually available to its shareholders, the HGT's values focus on transparency and clarity in its reporting, constructive challenge in maintaining a strong relationship with the Manager, and mitigating avoidable risk. The Board's strategy is to work closely with its selected Manager in a long-term relationship designed to support and encourage the Manager to build and maintain the skills and resources to deliver long-term, consistent returns through a concentrated portfolio of carefully selected businesses.

The Directors recognise the value in sustaining a culture that contributes to achieving the purpose of HGT in a way that is consistent with its values and strategy. Elements of culture include:

• Encouraging open and timely discussion within the Board and with the Manager, allowing time and space for original and innovative thinking;

• Ensuring that the interests of shareholders and the Manager (and its other clients) are well aligned, adopting a tone of constructive challenge, balanced when those interests are not fully congruent by robust negotiation of the Manager's terms of engagement;

• Drawing on Board Members' individual experience to support the Manager in its monitoring and change management of portfolio companies, for the benefit of all the Managers' clients;

• Willingness to make the Board Members' experience available to support the Manager in the sound long-term development of its business and resources, recognising that the long-term health of the Manager is in the interests of shareholders in HGT;

• Appreciating that the asset class, as well as the individual businesses in which HGT invests, are not well understood by all shareholders, adopting a policy of maximum transparency, consistent with the commercial interests of the portfolio companies, and clarity in reporting;

• Willingness to use all available means to communicate with shareholders and potential investors, and to meet shareholders and consider their views; and

• Acceptance that the prime purpose of HGT is to provide an efficient vehicle through which shareholders gain exposure to a well-managed, concentrated and leveraged portfolio and that the Board should not seek to add further investment risk.

A healthy corporate culture contributes to the long-term success of HGT. The following observable outcomes may be indicative of the Directors' success in embedding a healthy corporate culture in HGT's processes and policies, and actively promoting it through their behaviours:

• Continued support for HGT's shares and good, consistent trading performance;

• The breadth and quality of the share register, including willingness of shareholders to maintain their holdings over the long term rather than trade them short term;

• The extent to which the partners and staff of the Manager are willing to be long-term shareholders in HGT;

• Recognition of the transparency and clarity of reporting for HGT's reports to shareholders and disclosed on its website; and

• Recognition of the quality of the HGT's shares as an investment by the number of broker recommendations as a long-term hold.

The Board has worked to incorporate these behaviours and processes into the annual review of the Manager, strategic planning, the annual evaluation of Board effectiveness and reporting to stakeholders. These tend to embed the consideration of stakeholders' interests, a long-term perspective, the maintenance of a reputation for transparency and high standards of governance, corporate reporting and business conduct more generally into the HGT's culture and processes.

For and on behalf of the Board

Roger MountfordChairman of the Board6 March 2020

Hg's review

Building businesses that change how we all do business

Hg is a specialist private equity investor focused on software and service businesses.

Our business model combines deep sector specialisation with dedicated operational support. Hg invests in growth companies in expanding sectors, primarily via leveraged buyouts in businesses with operations in or across Europe.

Hg's vision is to be the most sought-after private equity investor within our sector focus, being a partner of choice for management teams, to provide consistent, superior returns for HGT and our other clients whilst providing a rewarding environment for Hg colleagues.

References in this Annual Report and Accounts to the 'portfolio', 'investments', 'companies' or 'businesses', refer to a number of investments, held as:

• indirect investments by HGT through its direct investments in fund limited partnerships (HGT LP, HGT 6 LP, HGT 7 LP, HGT 8 LP, HgCapital Mercury D LP ('Hg Mercury'), HGT Mercury 2 LP, HGT Saturn LP and HGT Transition Capital LP) of which HGT is the sole Limited Partner;

• a secondary purchase of a direct interest in Hg's Genesis 6 fund through HgCapital 6E LP ('Hg6E'), in which HGT is a Limited Partner; and

• direct investments in renewable energy fund limited partnerships (Asper Renewable Power Partners LP ('Asper RPP I LP') and Asper Renewable Power Partners 2 C LP ('Asper RPP II LP'), of which HGT is a Limited Partner.

Hg Pooled Management Limited was authorised as an Alternative Investment Fund Manager with effect from 22 July 2014.For further details, refer to pages 130 to 132 in the full Annual Report and Accounts.

About Hg

Overview

Hg began life as Mercury Private Equity, the private equity arm of Mercury Asset Management plc. Mercury Asset Management was acquired by Merrill Lynch in 1997. In December 2000, the executives of Mercury Private Equity negotiated independence from Merrill Lynch, and Hg was established as a fully independent partnership, owned entirely by its Partners and employees.

Since then, Hg has worked hard to develop a unique culture and approach - setting us apart from other investors. We are committed to building businesses that change the way we all do business, through deep sector specialisation and dedicated and strategic and operational support.

Today, Hg has close to 200 employees representing the largest technology investment team in Europe.

We have three investment offices based in London, Munich and New York, with funds under management of around £11 billion and serving more than 100 highly regarded institutional investors, including private and public pension funds, insurance companies, endowments and foundations.

Hg is itself an entrepreneurially led, fast growing business, 100% owned and managed by its Partners.

HGT is the largest client of Hg, which has been contracted to manage HGT's assets since 1994 and offers investors a liquid investment vehicle, through which they can obtain exposure to Hg's diversified network of unquoted investments with minimal administrative burdens, no long‑term lock up or minimum size of investment, and with the benefit of a Board of independent Directors and corporate governance. HGT's strategy is to invest in parallel with all of Hg's current funds.

Investment strategy

Hg's investments are primarily focused on defensive growth buyouts in software and service businesses operating in specific end-market 'clusters' with enterprise values ('EVs') of £50m to over £5bn, growing faster than the broader economy. We predominantly seek controlling buyout investments in Northern European headquartered businesses, though such companies will often have a global footprint and customer base.

Hg's objective is to pursue investment theses supporting long-term growth, leveraging its expertise working in these sectors to implement initiatives designed to maximise organic expansion, as well as through rolling up fragmented sectors, over typical hold periods of approximately five years.

Hg has led over 100 investments in the software and service sector during the last 25 years. This focus means we have developed an institutional expertise and a deep understanding of the markets and businesses in which we invest.

Hg applies a rigorous approach when evaluating all investment opportunities. Our objective is to invest in the most attractive businesses, rather than be constrained by a top‑down asset allocation.

This flexible approach to investment means that, at any given time, the Hg portfolio is likely to comprise more than thirty software and service businesses with similar characteristics, but of different sizes, end-market focus, and maturity profiles.

Hg's new office in New York will also enhance the ability to crystallise and develop transatlantic investment opportunities, manage existing investments and make bolt-on acquisitions; as well as continue to engage with - and ultimately sell - portfolio companies to North American trade buyers. As the US has the largest technology sector, this also helps consolidate Hg's position as Europe's leading software investor.

Hg Saturn2018 - Large‑cap (EVs focus: >£1bn)• Fund size: £1.5bn• Typical hold: £400m-£500m

Hg Genesis2017 - Mid‑market (EVs: £250m-£1bn)• Fund size: £2.5bn• Typical hold: £100m-£250m

Hg Mercury2017 - Lower mid‑market (EVs: £50m-£250m)• Fund size: £575m• Typical hold: £30m-£60m

Transition Capital2018 - Lower mid‑market (EVs: £50m-£250m)• Fund size: £75m• Typical hold: £15m-£30m

One strategy over four funds across the size range in software & service businesses

HGT has made commitments to invest on the same financial terms as all institutional investors in Hg funds, with investments made into businesses with enterprise values ranging from £50 million to over £5 billion.

The Power of the Portfolio

Hg has a unique approach and strategy, with a focus on achieving scale in tightly defined clusters of expertise.

As a result, we have assembled a large portfolio of companies and business models that share similar characteristics but differ in size and maturity. This creates a natural environment for knowledge sharing, creating a network effect to drive best practices and value creation initiatives. This is why we believe in collaboration and the 'power of the portfolio'.

This scale and focus enables our businesses to benefit from being part of one larger organisation, whilst retaining their own identity with each management team incentivised by their own success.

______________________________________________________________________________________________________ 

On an aggregated basis, the Hg portfolio would represent the fourth largest, and fastest growing, software business in Europe.

______________________________________________________________________________________________________

The 'Hg sweet-spot' business model

Hg has a clear and robust business model, focused on long‑term consistent and defensive growth, predominantly through investment in buyouts with a Northern European angle. We seek companies that share similar characteristics, often providing a platform for merger and acquisition ('M&A') opportunities.

We believe that such companies have the potential for significant performance improvement.

We invest primarily in two main market sectors:

Software

Software is our largest sector of investment. We focus on businesses providing B2B vertical market application software and data, regulatory software and fintech and internet infrastructure.

We have invested in high‑quality, industry champions which have strong sector reputations, diverse customer bases, and which feature subscription‑based business models generating predictable revenues and cash flows. With more than 25 software investments in our portfolio, we bring a unique set of networks and insights to help support value creation in our businesses.

Services

Our services investments focus on companies with high levels of intellectual property, large fragmented customer bases, long‑term and stable customer relationships, and businesses which provide business‑critical services, preferably on a repeat or recurrent basis.

We target businesses with strong reputations within a niche, and we aim to grow and scale these businesses, either organically within existing markets or through acquisitions.

Deep knowledge and networks within our end-market clusters

Hg has a unique approach and strategy, with a focus on achieving scale in tightly defined clusters of expertise. This specialisation helps us to build deep know-how.

Tax & Accounting 15 years

Team System, Visma, Sovos Compliance, Cogital Group, IRIS

ERP & Payroll 12 years

Team System, P&I, Visma, Access, IRIS, Transporeon

Legal & Regulatory Compliance 12 years

Achilles, Trace One, STP, Citation, Mitratech, Litera

Automotive 11 years

Eucon, Mobility Holding

SME Tech & Services 9 years

Commify, Register, IT Relation, team.blue

Capital Markets & Wealth Management IT 6 years

FE Fundinfo

Insurance 6 years

A-Plan Group, Eucon

Healthcare IT 5 years

Evaluate, Allocate, MediFox, Lyniate

Note: Number of years refers to the number of years that Hg has invested in each cluster

Working together

Sharing Hg know-how and experienceBy virtue of the fact that Hg repeatedly invests in specific business models, our dedicated Portfolio Team has been able to tailor a differentiated approach to driving value creation during our ownership. Following each investment, our Portfolio Team works with the management of our investee companies to focus on a set of operational levers that are key to performance in an 'Hg sweet‑spot' business model: growth, digital marketing, value creation, customer success, technology, cyber security, product data analytics and talent. For each of these levers, the Portfolio Team has codified the Hg experience and best‑practices into set 'plays' which are deployed in collaboration with management.

Every company can access the team, but the nature of support can take a variety of forms. Often, members of our Portfolio Team provide direct support, taking on roles to help the business pursue growth more quickly. Another option is for our experienced industry experts to mentor senior executives, helping them build more scalable functions.

In other instances, the support comes through introducing management teams to their counterparts in other companies in which Hg is invested, specifically those who have faced comparable challenges.

Our focus areasFrom sharing best-practice 'playbooks' and resources, through to tailored teams of technical experts, we work closely with the companies we invest in to make sure they get the tools and guidance they need for business success.

• Growth

• Technology, Product & Offshoring

• Talent & Organisation

• Data Analytics

• Finance & M&A

• Transformation

• ESG & Sustainability

• Reporting & Communities

Working togetherWe view all of our business management teams as a part of the Hg portfolio community. And that means promoting a culture of working together to share ideas, experiences, advice and best-practice.

One of the most powerful ways the Portfolio Team motivates change is through peer‑to‑peer collaboration. This gives the management teams of our portfolio companies the ability to exchange ideas, insights, share best practice and learnings with others in the Hg portfolio and our external network of experts.

In 2019, over 700 portfolio company executives attended 16 forums hosted by Hg covering topics such as employee engagement, neurodiversity, finance function excellence, product strategy, women in leadership, sales and marketing, and data analytics to name a few.

In 2020, we plan to host 60 portfolio engagements, in the form of summits, forums and webinars, whilst also utilising broader communications, such as podcasts.

Hive - Hg's online community for everyday collaborationTo enable the continued collaboration across the portfolio, Hg launched 'Hive', its online trusted environment, in 2018. With 23 live communities and over 1500 members, peer‑to‑peer collaboration is unparalleled. Individuals are able to pose questions, start discussions, share and collaborate on content, and have access to best practice methodologies from world‑class experts. This is a clear differentiator in the market.

>90%members are from our portfolio companies

23

live communities

>1500

active members and growing!

For further information, please visit hive.hgcapital.com

Our team

c.200members of the team

3

Investment offices in London, Munich and New York

Hg succeeds through the analysis and understanding of new and emerging dynamics in the clusters in which it invests. This requires profound knowledge of technology, markets and business practices. To this end, we employ diverse and exceptionally talented teams to identify and execute investment opportunities and accelerate value creation during our ownership.

This specialisation - both in investment selection and portfolio management - requires significant resources and we have built a business employing close to 200 people, including nearly 120 investment and portfolio management executives, and other professionals.

Our investment and portfolio executives come from a range of backgrounds and experience including private equity, consulting, investment banking, accounting and industry specialists. Our Portfolio Team is comprised of a mix of senior operators and functional specialists, who typically have many years of experience in their respective specialist operational and strategic roles.

Investing primarily in European businesses, many of which have a global footprint, requires time and a deep understanding of local cultures. Accordingly, our people come from around the globe, including sixteen European countries and the USA. Our Partners have, on average, fifteen years' experience in the management of private businesses.

Positioning ourselves as a best-in-class recruiterHg's recruitment and selection processes are rigorous and agile which, along with our strong brand, leadership, sector focus, fund performance and vibrant culture, allows us to attract and hire the best talent in our industry.

Improving our ability to identify talentWe have enhanced our talent processes so that we can identify and accelerate the development of our top performers and high potential talent within the business. We believe that this is the basis of effective career and succession planning.

Employee engagementOur people are highly motivated by, and committed to, delivering outstanding value to HGT, our other institutional clients, and our portfolio company leadership teams. They are engaged by their work, our values and the opportunity to grow to their full potential within Hg.

Our values have evolved over many years and are embodied in our working culture; these are aligned with our performance and reward structures.

Hg works hard to ensure our employees are engaged. We use independent external benchmarks to gauge levels of engagement and take appropriate actions to ensure the highest possible levels of engagement.

We have a strong focus on career and personal development and provide a range of development opportunities to enable our talent to reach their full potential and perform at their best.

Developing future leadersWe are explicit about the behaviours we wish to encourage at Hg and have aligned recruitment, training, coaching, performance and rewards to our values - for everybody across the organisation, including our leadership.

A description of Hg's key staff is available at www.hgcapital.com/meet-us/

______________________________________________________________________________________________________ 

"By continuing to invest in our people and our expertise, we are able to work with the best management teams in our target clusters and actively help them to build great businesses"

Steven Batchelor, Chief Operating Officer, Hg

______________________________________________________________________________________________________

Diversity and inclusionHg has introduced a number of new policies in the last twelve months as part of a wider initiative around Diversity and Inclusion.

In line with this wider initiative, Hg is forming its first ever Diversity and Inclusion Steering Group, made up of representatives from across the firm. The Steering Group aims to promote a culture of inclusion that clearly values diversity in all its forms, including a number of global initiatives around gender balance, flexible working, mentoring programmes, training and awareness events.

Level 20Hg will maintain its commitment to industry-wide initiatives such as Level 20, a not for profit organisation aligned around a common vision to inspire more women to join the industry. In 2019, Hg Senior Partner, Nic Humphries, joined Level 20's Advisory Council.

______________________________________________________________________________________________________ 

" At Hg we aim to attract and maintain a team of the best possible investment and operational talent. To do this we need to ensure that we're building this team from the broadest range of potential employees.

Having a clear strategy and committed team looking at Diversity and Inclusion, with full support from the firm's senior leadership team, is crucial. "

Martina Sanow, Deputy Chief Operating Officer, Hg

______________________________________________________________________________________________________

Responsible investing

Growing sustainable businesses which are great employers, have a low environmental impact and are good corporate citizens

Why responsible investing is important to us

For Hg, Responsible Investment ('RI') means growing sustainable businesses which are great employers, have a low environmental impact and are good corporate citizens, whilst generating superior risk adjusted returns for the millions of pensioners and savers globally whose funds are invested with Hg.

We want the businesses we invest in to be genuinely focused on doing well for all stakeholders including employees, customers, suppliers, shareholders and the wider society. We firmly believe that responsible business practices help generate superior long‑term performance.

Our responsible investing journey

2019 was a year of strong continued progress for Hg.

We set ourselves the vision to be the most sustainable private equity firm in Europe and we were proud to achieve the top score, AA++ from The United Nations-supported Principles for Responsible Investment (UNPRI).

All portfolio companies assessed for their ESG values and policies in 2018 were reassessed in 2019 and we are pleased to report that there have been some significant improvements in performance. We have also enhanced our ESG reporting capabilities by implementing our assessment into our financial reporting system, iLevel to give a holistic view of each business's sustainability.

Whilst 2018 saw a complete review, refresh and relaunch of Hg's Responsible Investment strategy, resulting in our brand new Sustainable Business framework, 2019 was a year of embedding this into business as usual and advancing to Sustainable Strategy 2.0.

Our Board approved Strategy includes:

• Understanding the climate change risks associated with our portfolio, as well as the impact we have as a firm - We have worked with PwC to conduct a Climate Change risk assessment across our portfolio.

• Becoming Carbon Neutral - Our 2019 Carbon Footprint report, see below (or page 34 in the full Annual Report and Accounts) , shows Hg's value chain carbon footprint and what we have done to offset our emissions and become Carbon Neutral.

• Charitable Giving - Hg is a longstanding supporter of many charities and we have recognised that we can do more to have a positive impact on society. We are therefore exploring options to focus specifically on technology and education for the less privileged and expect to roll out these exciting initiatives during the course of 2020.

ESG in the deal process

ESG is embedded into the entire deal process, from screening to exit. As a first step, we are very clear on the types of businesses we do not invest in, which is outlined in our exclusion list. During due diligence, we assess companies for compliance with relevant laws in relation to environmental, social, governance, health and safety, bribery and corruption issues.

We also consider the inherent ESG risk of the company and carry out an associated ESG review detailing risks and opportunities in relation to our Responsible Business framework (see below or page 33 in the full Annual Report and Accounts).

We take an active approach to managing ESG during our ownership. This starts with a Responsible Business onboarding and maturity assessment within the first months of acquisition to identify areas for improvement where Hg can support the companies to realise their ambitions within and beyond our Responsible Business framework.

As part of our on-going engagement on Responsible Business, each business is re-assessed on an annual basis and we follow up to ensure appropriate actions are taken to improve as required. Face-to-face forums helps our management teams to network, share best practice and receive support (see below or page 29 in the full Annual Report and Accounts).

PRI

A signatory to the UNPRI since 2012.

AA++ 2019 PRI Assessment Score:'A+' for Strategy & Governance, and'A+' for Private Equity Ownership

Our Responsible Business framework

Hg's Responsible Business framework outlines key ESG areas of focus for software and service companies.

The framework is based on extensive research and forms the foundation for the ESG assessments we conduct of our businesses as part of onboarding and annually thereafter.

Essentials

There are certain minimum ESG requirements that Hg expects from all our businesses. These include:

• Governance and Business Integrity, such as a company code of conduct, appropriate controls, board composition and appropriate health & safety and grievance procedures.

• Legal, Compliance and Risk, including compliance with all laws and regulations, active risk management, as well as standards and policies to combat bribery, corruption, money laundering, anticompetitive behaviour and other malpractice.

• Data and Cyber security, which includes Hg's minimum standards for cyber security along with appropriate information protection practices and GDPR compliance.

Employees

One of the most important assets of our businesses are the employees. A diverse workplace with engaged and motivated staff is vital for growth and business success. We look at employees from four aspects:

• Purpose and culture, including company vision, mission and values.

• Grow businesses and talent, including job growth, healthy staff turnover, talent management and succession planning.

• Engagement and motivation by promoting transparent communications, health and wellbeing, learning opportunities, recognition and good leadership.

• Diversity of talent and equal opportunities irrespective of ethnicity, gender, disability and background.

Society

We want all our businesses to strive for positive external impact by acting transparently and contributing to society through their business practices, charitable and community support and external relations. Our businesses impact society in a number of ways:

• Community engagement including apprenticeships, charitable giving and volunteering.

• Environmental impact, such as energy use, carbon footprints, data centre efficiency and waste management.

• Positive relationships with key external stakeholders including customers and suppliers.

• Transparency of company commitments and progress, including external reporting and sustainability communications.

For more information please go to www.hgcapital.com/responsibility

To watch our Responsible Investing video, please go to hgcapital.com/responsibility

Certified Carbon Neutral Company

CarbonNeutral.com

Hg recognises the impact climate change has on the environment and society.

By measuring and offsetting our carbon footprint, Hg aims to do its part in tackling global climate change whilst supporting sustainable development in local communities.

We strive to lead by example and are actively working with our portfolio companies to raise awareness on climate change.

The issueAs long ago as 1994, the United Nations Framework Convention on Climate Change recognised that the climate system can be affected by GHG emissions and ozone depleting substances (ODS). The consumption of fossil fuels, other industrial activities and deforestation generate the majority of GHGs, such as carbon dioxide, nitrous oxide, methane, chlorofluorocarbons (CFC), hydrochlorofluorocarbons (HCFC) and hydrofluorocarbons (HFC). These gases are collectively known as "greenhouse" gases since they do not interact with short wave radiation from the sun, instead they absorb the reflected long wave radiation from the earth's surface and re-radiate this energy within the earth's atmosphere as heat.

MethodologyThis report outlines Hg's carbon footprint for the financial year 2018-19, which has been prepared by an external consultant, Natural Capital Partners, and includes our scope 1, 2 and 3 emissions: scope 1 accounts for the direct emissions from a company's operations; scope 2, the indirect emissions from a company's energy usage; and scope 3, any other indirect emission.

Hg's carbon footprint was quantified by reviewing all Hg premises' and employees' activity data in line with the GHG Protocol standard and applying the most relevant emission factors sourced from DEFRA's 2018 UK GHG Conversion Factors2 for Company Reporting. The emission sources included in Hg's 2018-19 report are:

Premises:Mains gas and electricity consumption, transmission and distribution losses, water consumption, wastewater leaving the premises for treatment, as well as waste.

Business Travel:Air travel including short- and long-haul flights. Rail including domestic journeys and Eurostar. Other forms of travel include taxi, as well as hotel stays.

Other:Staff commuting including by car, rail, underground and taxi, as well as courier deliveries.

Offset and reductionHg offsets all carbon emissions by supporting the Acre Amazonian Rainforest project, which prevents deforestation and promotes sustainable economic livelihoods in the Brazilian Amazon1. With funds raised through carbon finance, the project is able to work with local communities to create models of economic development which avoid deforestation and protect the ecosystem. The project delivers four of the 17 Sustainable Development Goals:

Hg is a certified Carbon Neutral company, committing to zero emissions by offsetting our entire carbon footprint. We recognise that offsetting is one way to reduce our environmental impact. In addition, we are committed to understanding ways in which we can reduce our overall footprint and investigating options around procuring renewable energy.

1 https://www.naturalcapitalpartners.com/projects/project/acre-amazonian-rainforest-conservation

2 https://www.gov.uk/government/publications/greenhouse-gas-reporting-conversion-factors-2018

ESG case study: Transporeon value-chain

How creating a network effect using cloud technology platforms is reducing global carbon emissions

OverviewHg is a strong advocate for how cloud technologies can significantly drive efficiencies within companies and across sectors. More efficient businesses mean lower levels of waste, which in turn is more sustainable.

In 2019, Hg invested in Transporeon, a cloud-based logistics platform, connecting over 1,200 shippers and c.90,000 carriers world-wide. Transporeon uses cloud technology to link all parties in the transport logistics supply chain to transport logistics platforms.

By creating a strong network effect through digitalisation, collaboration and big data, Transporeon enables more efficient sourcing, communication, collaboration and transactions in the logistics industry, which in turn helps to lower carbon emissions through a reduced number of empty cargo trucks (backhauls), reduced truck waiting times, as well as CO2 monitoring systems.

Overall, Transporeon helps to solve five key inefficiency challenges in the transport logistics sector:

1 Improving communication and transparency: easier, faster and integrated communication between carriers and shippers improves what has typically been a highly inefficient sector.

2 Reducing empty cargo trucks (backhauls): c.30% of trucks on the road today are empty. This contributes to unnecessary traffic congestion and CO2 emissions. By better linking up shippers and carriers, Transporeon's platform is helping to reduce empty mileage for carriers by up to 13%.

3 Reducing truck waiting times: Up to 90 minutes are wasted per truck when waiting to load or unload goods. Transporeon helps carriers to reduce truck waiting times by up to 30% and also to improve turnaround times by up to 20% through digitised appointment scheduling, security optimisation, enhancement of staff schedules and controlled inbound and outbound flow.

4 Manual processes: Phone calls, emails, faxes and manual paperwork are still commonly used in the freight industry. Transporeon helps carriers automate and replace manual systems, reducing the use of paper and cutting process costs up to 30%.

5 Helping carriers to calculate and monitor their carbon footprint: Transporeon also helps its clients to calculate the carbon footprint associated with transportation, adopting a standardised calculation method which is fully compliant to CEN EN 16258 standard. The calculated carbon footprint is directly displayed in the transport order - enabling clients to monitor and subsequently manage their carbon footprint.

Advanced Automation

AI and its application in the world of Tax & Accounting

The growth of enterprise resource planning (ERP), tax and compliance software has historically been driven by a requirement to help move businesses away from paper-based processes, to software-led workflows.

Hg has seen this evolution first hand, investing in this global growth story across the last two decades. This growth has been rapid and consistent, with thousands of small and medium-sized enterprises (SMEs) across the world now operating more efficiently, after digitising previously onerous processes.

Today we see demand for these services as showing further structural growth, whilst innovation in software and technology is certainly not standing still - so what's the next big theme?

Hg sees the application of artificial intelligence (AI) having a significant impact on the evolution of the Tax & Accounting universe over the next few years - and we're already seeing continuing development of this technology across the businesses we partner with.

Advanced Automation and AIAs a specialist software and technology investor, Hg is seeing applications of AI filtering into many of the sectors that we operate in. However, despite being well-covered, AI remains ill-defined.

The early AI 'revolution' was epitomised when computer scientists created a programme that could consistently beat a reigning world chess champion in a six-game match - but few people recognise this as AI today. Add into the mix 'Machine Learning', a subset of AI applications which is often used interchangeably with AI, the confusion grows.

We prefer the concept of 'Advanced Automation', especially in relation to the Tax & Accounting universe. For us, this covers the high levels of software automation that we're seeing in this sector, typically enabled by computing techniques from the field of AI.

This is rapidly making its way into core Tax & Accounting applications, resulting in a giant leap in productivity for its users.

Augmentation, not substitution

Despite a proliferation of start-ups and unicorns within this field, we're not seeing many standalone products conquering the space. Instead we're seeing AI applications that augment existing products.

Look at how AI innovation is improving the quality of core applications in other fields of tech, like Google Maps and Gmail, rather than creating new, separate products under an 'AI' brand. Similarly, in a Tax & Accounting context, we do not foresee many new products arising. Rather, we expect a wave of product augmentations to come forth, primarily powered by Advanced Automation.

hgcapital.com/insight/advanced-automation-ai-and-its-application-in-the-world-of-tax-accounting/

______________________________________________________________________________________________________ 

"We believe firms can transform their practice by unlocking client and practice data to deliver advisory-based services, and generate more business opportunities to empower accountants to thrive in the digital accountancy economy."

Elona Mortimer-Zhika, Chief Executive Officer, IRIS Software Group

______________________________________________________________________________________________________

"Today, over 200,000 Visma customers are using a product that applies machine learning. All of these products have a common aim - to solve problems faced by our customers."

Jostein Håvaldsrud, R&D Director for Visma Software

______________________________________________________________________________________________________

The Development of Advanced AutomationLike the prior evolution in Tax & Accounting software, we expect Advanced Automation to continue to make bookkeepers and accountants more productive at their work: those who do will become the most competitive in their field. Then, as these products strengthen and become part of a core offering, demand will grow - gradually moving from a 'nice-to-have' feature to a 'need-to-have' service from software vendors. We can already see this happening and it will only become more pronounced over the next few years.

As a result, for the vendors of this software, Advanced Automation products and services are likely to become a 'hygiene factor' - they will need to have this offering in order to remain shortlisted by their buyers. It is therefore vital that these businesses are developing this technology now - ahead, rather than behind, the curve - in order to remain competitive.

The future of Advanced AutomationIt is said that 'necessity is the mother of invention' and we can certainly see how this applies to AI. The volume of underlying ERP data alone is approximately doubling every 18 months. As this increases, the human ability to process data meaningfully, without proper data processing software tools, is significantly reduced, even for the best accountants and managers.

For Hg, this ever-growing complexity in the audit process, alongside the great strides of innovations we are currently seeing in the market, gives us confidence that there will be a new wave of Advanced Automation developed to meet this demand, drive change and generate material value in millions of businesses globally.

Hg's investment in Tax & AccountingHg is a sector expert investor, committed to helping build ambitious businesses across the technology and services market in Europe and the US.

Hg's Team of 120 investment and portfolio management professionals is the largest and most experienced in Europe. These deeply resourced sector teams focus on specific sub-sectors and investment themes to identify companies which have the potential to grow, create employment and become leaders in their space.

Hg made its first investment in the tax and regulatory compliance software market in 2004. Since then, Hg has invested in over 11 platform companies and more than 200 acquisitions - we currently own businesses worth over $10 billion in this sector, including IRIS, Visma and Sovos.

This clustered investment strategy gives us unique insights and experience which benefit the companies we back, their customers and their employees.

AI case studies across the Hg portfolioHg is currently partnered with a number of large players in this space and we can see strong progress being made in developing these capabilities. There are three main themes: improving customer productivity, improving customer service and combating accounting errors and/or accountancy fraud.

1 Customer ProductivityVisma, an industry champion in Nordic and Benelux ERP, with >8,500 employees and >900,000 customers, has adopted AI into many of its core products, with the aim of continually reducing costs through further automation of internal processes, whilst also improving the customer experience.

They have c. 200 developers working full time on automation projects, for example, 'Visma Scanner', which reads customer receipts almost instantly, inputting key details into an expense-management system. 'AutoInvoice' is an electronic invoicing tool which currently serves >100,000 users in real time, business-to-government reporting, helping to save 'people-hours' by automating Accounts Payable / Accounts Receivable functions.

TeamSystem is a leading provider of business-critical, regulatory driven software products to c. 250,000 accountants, HR professionals and SMEs in Italy. It is also developing automated scanning and document recognition services for its customers, combining classic optical character recognition (OCR) with modern machine learning practices to create a product with around 75% accuracy which improves day by day - saving significant time for customers and increasing productivity.

Tommaso Cohen, CFO and Strategy Executive Director at TeamSystem, said:"Our core strategy includes investing heavily in R&D to support the constant improvement and growth of our products and services. A key part of this is technology, which we look to evolve in order to improve the productivity and experience of our customers. Machine learning plays a big role in some of our latest projects and development of this technology is vital to stay competitive in this space."

2 Customer ServiceVisma has also built an engine which, with 95% accuracy, can automatically distribute customer support tickets to the correct customer support team, based on message content - saving significant time and therefore better servicing customer enquiries. Third-party chat bots have also been developed to provide customers with further assistance, reducing the need for internal support by around 20%.

TeamSystem have invested in chat bot technology to help improve customer service as well. The service is being developed to improve and learn, supporting TeamSystem's accounting customers, facilitating the exchanging of documents in a safe environment and generally providing additional support.

Jostein Håvaldsrud, R&D Director for Visma Software, said:"Most software is equal to all users, unless customised. Machine learning is one way of achieving this. It can be used to analyse patterns of usage, then predict the next step of users, and also guide them. At Visma, we're using machine learning heavily in chat-bot services and we are testing out speech-recognition to interact with our software. Machine learning can also be used to eliminate manual work related to input of data. Today, over 200,000 Visma customers are using a product that applies this technology. All of these products have a common aim - to solve problems faced by our customers."

3 Checking for Data Anomalies

IRIS is a leading provider of critical software solutions for Tax & Accounting in the UK, serving more than 20,000 accountancy practices.

In 2018, it launched 'IRIS AI', a family of products and services for its customers. The first product in this offering, 'Ai Auditor™', was developed by MindBridge Ai. It scans the entirety of a client's general ledger for any potential errors using a hybrid of machine learning and AI techniques, vastly improving on legacy/manual spot checks, and is saving SME businesses from administrative errors.

It is also proving effective at checking for fraud, giving accountants a further layer of comfort that no fraudulent behaviour has taken place.

Elona Mortimer-Zhika, CEO at IRIS Software Group, said:"AI is generating a lot of interest among accounting and finance professionals and there is an appetite to reduce repetitive, time-consuming and redundant tasks to free up capacity for more lucrative, added-value consultancy for clients.

We believe firms can transform their practice by unlocking client and practice data to deliver advisory-based services, and generate more business opportunities to empower accountants to thrive in the digital accountancy economy. Our relationship with MindBridge Ai in bringing Ai Auditor to the UK market is a big stride in this direction."

Year in review

A high quality and focused portfolio of investments delivered a strong year of performance for HGT, driven primarily by robust trading across Hg's unrealised investments.

Top 20 investments:

(92% of the portfolio value)

______________________________________________________________________________________________________

+24%

Top 20 LTM sales growth

______________________________________________________________________________________________________

+35%

Top 20 LTM EBITDA growth

______________________________________________________________________________________________________

On an aggregated basis, the Hg portfolio would represent the fourth largest, and fastest growing, software business in Europe.

______________________________________________________________________________________________________

Net asset value (NAV)

During the year, the NAV of HGT increased by £234 million, from £805 million at 31 December 2018 to £1,039 million at 31 December 2019.

Analysis of NAV movements

A number of underlying factors contributed to the increase in NAV. Positive impacts were the £183.6 million revaluation of the unquoted portfolio and uplifts of £26.0 million on the realisation of investments compared with their carrying value at the start of the year. Shares issued during the year contributed a further £75.3 million. Reductions in NAV included: the payment of £18.4 million of dividends to shareholders and Hg's remuneration (£12.3 million and £15.7 million increase in the provision for future carried interest).

Analysis of movements in the value of investments

During the year, the value of the unrealised investments increased by £183.6 million, before the provision for carried interest. The majority of the increase (£205.5 million) relates to increases from profit growth in the underlying investments and £63.2 million from increased valuation multiples.

Acquisitions net of realisations at carrying value added £25.2 million. An increase in net debt of £58.3 million and £27.4 million of adverse currency movements contributed negatively to the unrealised portfolio.

Top 20 portfolio trading performance as at 31 December 2019

The top 20 investments (representing 92% of total investments by value) have delivered strong sales growth of 24% and EBITDA growth of 35% over the last twelve months ('LTM') the latter being an acceleration from the growth levels reported in December 2018.

The business model characteristics of the companies we are invested in give us confidence that double-digit growth can be achieved consistently going forward.

More than 75% by value of the top 20 businesses within the portfolio are seeing double-digit revenue growth, and more than 85% have delivered double-digit EBITDA growth over the last twelve months.

Profits have grown at a faster rate than revenues with investment made into the cost base of a number of companies, for example, to finance increased sales and marketing capabilities, strengthen management and new product development, continuing to bear fruit.

We have seen very robust and consistent trading performance from the majority of the portfolio with particularly strong growth from P&I, Access, Visma and Commify in the technology sector and from CogitalGroup and Citation in the services sector. Whilst new to the portfolio, Litera, Transporeon and team.blue have had a good start to their partnership with Hg.

Where a company has not performed as well as we would like, we have reflected this in their valuation. During 2019, we took the decision to write down Achilles, whose operational performance had been below expectations; however we believe we can see a path to recovery here.

Overall, continued robust earnings growth and strong cash generation continue to drive equity value in our investments.

Valuation and net debt analysis as at 31 December 2019

Our valuation policy is applied consistently, in accordance with the IPEV Valuation Guidelines. Each company has been valued individually, based on the trading multiples of comparable businesses and relevant and recent M&A activity; this resulted in an average EBITDA multiple for the top 20 investments of 19.8x (19.5x at 30 June 2019).

There remains a continued shift in the mix of the portfolio to higher growth businesses, in particular in the software sector, where we hold a number of companies with substantial opportunities to grow their Software as a Service ('SaaS') business.

We continue to take a considered approach in determining the level of maintainable earnings to use in each valuation, in line with the IPEV Valuation Guidelines. Most holdings have been valued using the LTM earnings to 30 November 2019, unless we have anticipated that the outlook for the full current financial year is likely to be lower, in which case we have used forecast earnings. The earnings figure used may be adjusted on a pro-forma basis reflecting any acquisitions, disposals or other adjustments to the extent a buyer would make such adjustments. In selecting an appropriate multiple to apply to a company's earnings, we look at a basket of comparable companies, primarily from the quoted sector, but also making use of M&A data. We also use back testing to understand substantive differences that legitimately occur between an exit price and the previous fair value assessment to inform our valuation policy.

Our companies make appropriate use of gearing, with a weighted average net debt for the top 20 of 6.2x LTM EBITDA (6.3x at 30 June 2019). Many of our businesses have highly predictable, strong earnings growth and are very cash generative, enabling us to use debt to reduce their cost of capital and improve returns on the equity we hold.

Outstanding commitments of HGT

At the end of 2019, HGT held liquid resources of £189 million, supported by an undrawn bank facility of £80 million. Outstanding commitments as at 31 December 2019 were £336 million, as listed below. We anticipate that the majority of these outstanding commitments will be drawn down progressively over the next year and are likely to be partly financed by cash flows from future realisations. Future commitments are likely to be drawn down over a period of four to five years (2020 - 2025). Additionally, to mitigate the risk of being unable to fund any draw‑down under its commitments to invest alongside Hg's funds, the Board has negotiated a right to opt out, without penalty, of HGT's obligation to fund such commitments where it does not have the funds to do so or certain other conditions exist.

1 Includes accrued income.

Portfolio diversification and performance

Hg cluster by value

49% Tax & Accounting

15% ERP & Payroll

12% Legal & Regulatory

8% SME Tech & Services

6% Healthcare IT

6% Automotive

2% Insurance

2% Capital Markets & Wealth Management IT

Geographic spread by value

31% UK

28% Scandinavia

18% North America

15% Germany

8% Other Europe

Investment vintage by value

13% 2019

28% 2018

9% 2017

20% 2016

3% 2015

27% pre 2015

Analysis by value of investment return relative to its original cost2

97% Above

3% Below

2Representing aggregate realised proceeds and unrealised valuations of an investment

Investments and realisations

Investments 2019

Over the course of the year, Hg invested a total of £1.4 billion on behalf of its clients, with HGT's share being £117 million.

The vast majority of our investments are generated by establishing and developing relationships with companies over the longer term and typically pursuing opportunities where we have a strong relationship with a founder or management team. By doing this, we believe that we can invest in the very best businesses within our chosen clusters.

We continue to look for businesses that share similar underlying business model characteristics, such as: high levels of recurring revenues; a product or service that is business-critical but typically low spend; low customer concentration; and low sensitivity to market cycles. This is a theme that runs through many of our new investments and we believe companies with these characteristics will remain in high demand across market cycles.

New investments

Transporeon£42m invested on behalf of HGT, including £6m in co-investment

In March, Hg completed an investment in Transporeon Group ('Transporeon'), one of the world's leading cloud‑based logistics platforms, via the Hg Genesis 8 Fund.

Founded in 2000 and headquartered in Ulm, Germany, Transporeon connects a global network of over 1,200 shippers and >90,000 carriers, enabling them to source, communicate, collaborate and transact more efficiently, whilst also helping to lower CO2 emissions by reducing empty back-haul journeys. This investment represents another example of Hg's focus on Cloud‑based software and network companies, providing SaaS solutions to the business community.

Litera£34m invested on behalf of HGT

In May, Hg completed an investment in Litera. Based in Chicago, New York and London, Litera provides a leading suite of legal document productivity applications, delivered as an end-to-end platform to more than 1,300 organisations across the globe.

This investment follows one of Hg's core investment theses, focused on the secular growth of software suppliers for business-critical functions in the legal and regulatory compliance sector. Hg has been actively following this theme for over 15 years, with Litera representing the sixth legal and compliance business currently in Hg's portfolio.

Hg's team has known Litera for several years, recognising it as a business that solves mission-critical workflows for its customers, leading to strong recurring revenues and displaying the same growth characteristics as many others in the Hg portfolio.

team.blue£25m invested on behalf of HGT

In March, Hg completed an investment in Combell Group, a mass hosting provider offering web enablement solutions focused mainly on the Belgium and Danish markets with a smaller presence in the Netherlands, via the Hg Genesis 8 Fund, before supporting the transformational acquisition of TransIP Group in June 2019, also focused on the Netherlands. Finally, in September 2019, Register Group was acquired (a Mercury 2 portfolio company) - focused on growth markets in Southern Europe, Italy and Spain, as well the UK and Ireland. Following these acquisitions, the combined group rebranded as team.blue.

team.blue is a leading European provider of mass hosting services to SMEs, primarily in North-Western Europe (Netherlands, Belgium, Denmark, Ireland and UK) and Southern Europe (Italy and Portugal) with a growing presence in Sweden, Switzerland and Spain. The business has close to two million SME and small office/home office customers and is a one-stop partner for web hosting, domains, e-commerce and application solutions.

Further investments

Visma£19m invested on behalf of HGT

In May and October, Hg made further investments in Visma, a leading provider of mission‑critical business software to SMEs in the Scandinavian region via the Hg Saturn Fund. In 2002, Hg identified regulatory‑driven, subscription‑based software as an attractive sub‑sector with scope for considerable growth over the following decade and initially invested in Visma in 2006. Since this time the business has consistently exceeded our investment plans, having acquired more than 150 companies over our ownership period to become one of today's leading and largest SaaS companies in Europe, with more than £1 billion in cloud revenues.

Lyniate£4m invested on behalf of HGT

In June and September, the Hg Mercury 2 Fund made further bolt-on investments in Lyniate. Headquartered in Boston, USA, Lyniate is a global leader in healthcare interoperability and data liquidity solutions. Their software serves public and private hospitals, health systems, Health Information Exchanges, OEM vendors, public health departments and federal government organisations.

New investment since the year-end

P&IAn estimated £35m invested on behalf of HGT including £5m in co-investment

In December 2019, Hg announced an investment in Personal & Informatik AG ('P&I'), a leading provider of cloud-based HR software, headquartered in Germany. This acquisition, via the Hg Saturn fund, valued the business at an enterprise value of €2 billion. The seller, Permira, will remain invested in P&I with a substantial minority stake. This transaction is due to complete in March 2020.

Argus£35m invested on behalf of HGT including £4m in co-investment

In January 2020, Hg completed an investment in Argus Media ('Argus'), a leading global provider of energy and commodity price reporting via the Hg Saturn Fund.

Founded in 1970, Argus is an independent media organisation headquartered in London. Companies in 140 countries around the world use Argus data to index physical trade and as benchmarks in financial derivative markets as well as for analysis and planning purposes.

Interlad£31m invested on behalf of HGT

In February 2020, Hg completed an investment in Intelerad Medical Systems ('Intelerad'), a leading global provider of medical imaging software and enterprise workflow solutions, via the Hg Genesis 8 Fund.

Founded in 1999, Intelerad specialises in diagnostic viewing, reporting and collaboration solutions for radiologists. Headquartered in Montreal, the business has over 400 employees located in offices in Canada, the US, the UK, and Australia. The company serves over 300 healthcare organisations around the world, including radiology groups, imaging centres, clinics and reading groups with a strong and growing presence in hospital imaging departments. Healthcare IT is a core sector for Hg, with an investment focus on healthcare operations, core systems, life sciences digitisation, interoperability and population health. Intelerad represents the 5th healthcare technology investment in Hg's current portfolio.

smartTradeAn estimated £17.5m invested on behalf of HGT including £10m in co-investment

In February 2020, Hg announced an investment in smartTrade Technologies ('smartTrade'), a leader in multi-asset electronic trading solutions, via the Hg Mercury 2 fund. The transaction is due to complete in March 2020.

Headquartered in France, smartTrade is a managed services and hosted software provider for trading desks, enabling its global client base of financial institutions to develop and run high-performance trading platforms throughout the world. Hg has been investing in Capital Markets & Wealth and Asset Management technology for almost 20 years and has known the smartTrade team since 2015. During this time Hg has recognised smartTrade as a truly innovative business with an exceptional leadership team, which has developed leading, modular solutions, used by sell-side and buy-side market participants.

With continued potential for growth, smartTrade is a compelling fit with Hg's expertise and capabilities.

Further investment since the year-end

Achilles

£10m invested on behalf of HGT

In January 2020, HGT made a further investment in Achilles, structured as a debt instrument via the Transition Capital Fund. This will be used to implement the roll-out of new technology which will complete the migration of the business onto a new platform "my.Achilles"

Further detail on investments as at 31 December 2019 can be found on pages 54 to 75 in the full Annual Report and Accounts.  

Realisations 2019

Over the course of the year, Hg has returned a total of £843 million to its clients, including £117 million to HGT.

Whilst exits over 2019 were slower in pace than over the very active prior two years, we have continued to look at opportunities to realise proceeds for our investors.

We have also taken advantage of buoyant debt markets during the period by refinancing investments where we have good visibility of their future earnings, returning cash proceeds to our clients, including HGT, and we will continue to assess further opportunities.

Exits

Foundry£28m returned to HGT

In April, Hg completed the sale of Foundry, a UK headquartered leading global developer of high-end visual effects ('VFX') and 3D design software, to Roper Technologies Inc., a leading diversified technology company. Hg invested in Foundry from the Hg Genesis 7 fund in 2015, recognising the company as a leading global provider of vertical market application software, with rich intellectual property, strong positioning within its business segments and with the potential to enter new market segments. Over the course of the investment, Hg worked with the company's management team to broaden Foundry's go-to-market strategy, invest in its cutting-edge Media & Entertainment product offering and accelerate the growth of the company's Digital Design division.

The sale of Foundry delivered a 2.1x investment multiple and a 22% gross IRR over the investment period. This transaction resulted in an uplift of 79% over the carrying value of the business at 31 December 2018.

Register£17m returned to HGT

In September, team.blue (formerly Combell Group), a leading mass hosting business in Belgium and Denmark, announced the acquisition of Register (formerly DADA), a pan-European mass hosting company headquartered in Italy. team.blue is the third largest shared hosting business in Europe with more than 2 million customers across 10 countries. HGT was already invested in team.blue; its investment in team.blue increased as a result of this transaction and was valued at £31 in total at year-end.

Partial exits

Asper£11m returned to HGT

In September, HGT agreed the sale of the Asper RPP II Fund interest to two strategic buyers, as part of a wider secondary sale process. Additional consideration is deferred and due to HGT on the first anniversary of the sale.

Raet£10m returned to HGT

As reported in the 2018 full year accounts, last year Hg agreed to the sale of Raet's operations to Visma. During the year, £10.3 million of deferred proceeds were received in respect of this investment.

Visma£3m returned to HGT

In February, Hg completed the part‑realisation of Visma, a leading provider of business‑critical software to private and public enterprises in the Scandinavian region, from the Hg Genesis 7 Fund, to the Canada Pension Plan Investment Board (CPPIB). Following completion of this transaction,

Hg will remain the lead investor in Visma alongside some of the world's largest institutional investors. Together, Visma and its strong investor base will continue to reinforce Visma's position as a leading SaaS business in Europe and one of the world's most successful SaaS companies.

Refinancings

A-Plan Group£14m returned to HGT

In March, the Genesis team will complete the refinancing of A‑Plan Group, a leading independent high‑street insurance broker in the UK. A‑Plan Group has now returned 1.4x the original investment made in April 2015 to the Hg Genesis 7 Fund.

Commify£9m returned to HGT

In September, the Mercury team completed the refinancing of Commify, a leading Application-to-Person messaging service in Western Europe.

FE fundinfo£6m returned to HGT

In December, the Hg Mercury team completed the refinancing of FE fundinfo, the global fund data and analytics business, catering to asset managers and fund distributors.

team.blue£5m returned to HGT

In June, team.blue (formerly Combell Group), a mass hosting provider offering web enablement solutions to SMEs across Europe, headquartered in Belgium, merged with TransIP, a leading hosting and Virtual Private Server ('VPS') provider based in the Netherlands. Subsequently, Hg completed a refinancing of the enlarged business, repaying a portion of Hg's original loan notes.

Sovos Compliance£2m returned to HGT

In April, Hg completed the refinancing of Sovos, a leading global provider of tax compliance software solutions in Hg Genesis 7. This was driven by strong trading performance, which has seen Sovos deliver robust double-digit compound growth in revenue and EBITDA since acquisition.

EidosMedia£1m returned to HGT

In September, the Hg Genesis team completed the refinancing of EidosMedia, a leader in Enterprise Content Management software serving media and Financial Services markets.

Exit since the year end

e-conomic£2m returned to HGT

In January 2020, Hg realised its residual holding in e-conomic, a leading European Software as a Service ('SaaS') accounting solutions provider to SMEs based in Denmark.

Further detail on investments as at 31 December 2019 can be found on pages 54 to 75 in the full Annual Report and Accounts.

To view our press releases, please visit hgcapitaltrust.com/news-and-media/press-releases/pr-2019.aspx

Summary of investment and realisation activity

Investments made during the year

  Realisations made during the year

Hg's outlook

______________________________________________________________________________________________________

"In 2019, we have reinforced Hg's focus and scale. Focus on the software and service universe and scale to ensure our reach, expertise and network goes broader and deeper than ever before.

Today Hg looks less like a traditional private equity firm and more like a fully collaborative, software and services organisation. This is our vision for the future of private equity."

Matthew Brockman, Managing Partner, Hg

______________________________________________________________________________________________________

Investments

We believe that the clarity and distinctive focus of our strategy as a disciplined investor provides us with several clear advantages, especially in the current high asset price market environment. Specifically, we continue to concentrate on companies that provide non‑discretionary, business‑ critical products or services, to fragmented customer bases, and which benefit from strong contracted or recurring revenues. This focus on defensive growth should enable us to identify opportunities that will generate strong, risk adjusted returns for our clients across market cycles.

We continue to see attractive investment opportunities in our eight target 'clusters', and we continue to invest selectively, capitalising on situations where we have a specific angle and have built many years of knowledge of the business and its end-market clusters, and developed strong relationships with the founders and management teams.

Hg's clear investment focus, combined with our scale, large investment team reach and network, produces more investment opportunities than Hg would want to complete in any given year. This means we are able to be highly discerning in the opportunities we pursue. In 2019, just within our 8 target clusters, Hg declined over 30 investment opportunities, while we made three new platform investments; a further 25 situations remained under review at the year end.

Across our fund stack we expect investment activity in 2020 to continue broadly in line with our recent historic pacing. In 2020 we have already announced or closed investments in Argus Media, P&I, Intelerad and smartTrade for the Saturn, Genesis and Mercury funds.

As ever, bolt-ons and strategic M&A within the current portfolio remain a key focus and across the current portfolio we have multiple live M&A situations; MediFox, Access, Visma, Mitratech, Sovos, and IT Relation have already signed meaningful bolt-ons in 2020.

Realisations

Over 2020 we will continue to focus on opportunities to crystallise value across our portfolio, and return money to our clients, including HGT. We have several exit and refinancing processes currently underway or specifically planned for 2020 and we believe these will help drive the continued positive performance of HGT.

Current risks

The Covid-19 situation continues to worsen. At this stage, we expect the Coronavirus to have limited direct impact on Hg's portfolio, given the defensive growth characteristics of the portfolio, with a strong focus on protected business models selling business-critical and non-discretionary software and services to their underlying customers.

In the case of a significant spread of the virus to Europe, again, we expect the direct impact on our businesses to be limited versus other sectors (particularly consumer discretionary or travel related) given the underlying nature of our long-term subscription-revenue based B2B software platforms, although general business sentiment will no doubt be affected. We will continue to keep this situation under close review.

It seems highly likely that spread of Covid-19 will now lead to meaningfully lower global growth in 2020, and potentially a global recession. Given we are now 12 years into one of the longest sustained periods of global growth on record, we have been anticipating a recessionary environment for the last few years. We believe our current investments are well positioned to continue to create value on both an absolute and relative basis going forward, even if macro-economic conditions deteriorate.

Whilst we are yet to see how the new relationship between the UK and European Union will develop, we remain confident that the types of businesses in which we invest will continue to perform well.

Long-term prospects

At Hg, we have never seen more opportunity to back great software and tech-enabled service companies that are changing how we all do business.

We continue to see the impact of positive trends driving technology growth for the next 10 to 20 years, including:

• the automation of routine tasks; Software used to save time and improve accuracy in business processes;

• the rise of software interconnectivity; through the use of application program interfaces ('APIs') that let software talk to software, thereby exponentially increasing the amount of usable data available for businesses; and

• increased desire from governments for regulatory visibility on businesses (and citizens); in almost all B2B software there are compliance and government tailwinds.

We believe our investment strategy works. The portfolio is in good health overall and growing strongly. Trading over the last twelve months has continued to generate average double-digit sales and EBITDA growth of 24% and 35% respectively, across the top 20 businesses, and margins of 29%. This should create a store of future value for the shareholders of HGT.

Overview of the underlying investments

held through HGT's limited partnerships

1 Including accrued income but before the provision for carried interest of £58,087,000.

Non-Statutory Accounts

The financial information set out below does not constitute the Company's statutory accounts for the years ended 31 December 2018 and 2019 but is derived from those accounts. Statutory accounts for 2018 have been delivered to the Registrar of Companies, and those for 2019 will be delivered in due course. The Auditors have reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the Auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditors' report can be found in the Company's full Annual Report and Accounts at www.hgcapitaltrust.com

Financial statements

Notes to the financial statements

1. Principal activity

The principal activity of HGT is investment. HGT is an investment company as defined by Section 833 of the Companies Act 2006 and an investment trust under Sections 1158 and 1159 of the Corporation Tax Act 2010 ('CTA 2010'), and is registered as a public company in England and Wales under number 01525583 with its registered office at 2 More London Riverside, London SE1 2AP.

2. Basis of preparation

The financial statements have been prepared under the historical cost convention, except for the revaluation of financial instruments at fair value as permitted by the Companies Act 2006, and in accordance with applicable UK law and UK Accounting Standards ('UK GAAP'), including Financial Reporting Standard 102 - 'The Financial Reporting Standard applicable in the United Kingdom and Republic of Ireland' ('FRS 102') and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' ('SORP'), issued in October 2019. All of HGT's operations are of a continuing nature.

HGT has considerable financial resources and, as a consequence, the Directors believe that HGT is well placed to manage its business risks. After making enquiries, the Directors have a reasonable expectation that HGT will have adequate resources to continue in operational existence for the next twelve-month period from the date of approval of this Report.

Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts. See above (or page 15 in the full Annual Report and Accounts) for the Directors' commentary on going concern.

The same accounting policies, presentation and methods of computation are followed in these financial statements as applied in HGT's previous annual audited report and accounts.

3. Organisational structure and accounting policies

Partnerships where HGT is the sole limited partnerHGT entered into eight separate partnership agreements with general and founder partners in May 2003 (subsequently revised in January 2009), January 2009, July 2011, March 2013, December 2016, February 2017, January 2018 and February 2018; at each point an investment holding limited partnership was established to carry on the business of an investor, with HGT being the sole limited partner in these entities.

The purpose of these partnerships, HGT LP, HGT 6 LP, HGT 7 LP, HGT 8 LP, HgCapital Mercury D LP, HGT Mercury 2 LP, HGT Saturn LP and HGT Transition Capital LP, (together the 'primary buyout funds') is to hold all HGT's investments in primary buyouts. Under the partnership agreements, HGT made capital commitments into the primary buyout funds, with the result that HGT now holds direct investments in the primary buyout funds and an indirect investment in the fixed asset investments that are held by these funds, as it is the sole limited partner. These direct investments are included under fixed asset investments on the balance sheet and in the table of investments on page 45 in the full Annual Report and Accounts. The underlying investments that are held indirectly are included in the overview of investments on page 52 in the full Annual Report and Accounts.

Consolidated financial statements have not been prepared because HGT does not have control over the operating and financial activities of the underlying investment holding limited partnerships, as the general partners are responsible for the management of their activities.

Partnerships where HGT is a minority limited partnerIn July 2011, HGT acquired a direct secondary investment in HgCapital 6 E LP ('Hg 6E LP'), one of the partnerships that comprise the Hg 6 Fund, in which HGT is now a limited partner pari passu with other limited partners. This is a direct investment in the Hg 6E LP Fund, as shown on the balance sheet and in the table of investments on page 45.

HGT also entered into partnership agreements with other limited partners with the purpose of investing in renewable energy projects by making capital commitments in Asper Renewable Power Partners LP ('Asper RPP I LP') and Asper Renewable Power Partners 2 C LP ('Asper RPP II LP') (together the 'renewable funds'). These are direct investments in the renewable funds, as shown on the balance sheet and in the table of investments on page 45 in the full Annual Report and Accounts.

Priority profit share and other operating expenses, payable by partnerships in which HGT is a minority limited partner, are recognised as unrealised losses in the capital return section of the income statement and are not separately disclosed within other expenses.

Priority profit share and carried interest under the primary buyout limited partnership agreementsUnder the terms of the primary buyout fund limited partnership agreements ('LPAs'), each general partner (see Note 5) is entitled to appropriate, as a first charge on the net income of the funds, an amount equivalent to its priority profit share ('PPS'). HGT is entitled to net income from the funds, after payment of the PPS.

In years in which these funds have not yet earned sufficient net income to satisfy the PPS, the entitlement is carried forward to the following years. The PPS is payable quarterly in advance, even if insufficient net income has been earned. Where the cash amount paid exceeds the net income, an interest free loan is advanced to the general partner by these primary buyout funds, which is funded via a loan from HGT. Such loan is only recoverable from the general partner by an appropriation of net income; until net income is earned, no value is attributed to this loan (see Note 5(b)).

Furthermore, under the primary buyout funds' LPAs, each founder partner (see Note 5(c)) is entitled to a carried interest distribution once certain preferred returns are met. The LPAs stipulate that the primary buyout funds' capital gains or net income, after payment of the carried interest, are allocated to HGT, when the right to these returns is established.

Accordingly, HGT's entitlement to net income and net capital gains is shown in the appropriate lines of the income statement. Notes 4, 5 and 12 to the financial statements disclose the gross income and gross capital gains of the primary buyout funds and also reflect the proportion of net income and capital gains in the buyout funds that have been paid to the general partner as its PPS and to the founder partner as carried interest, where applicable.

The PPS paid from net income is charged to the revenue account in the income statement, whereas PPS paid as an interest‑free loan, if any, is charged as an unrealised depreciation to the capital return on the income statement.

The carried interest payments made from net income and capital gains are charged to the revenue and capital account respectively on the income statement.

Investment income and interest receivableAs stated above, all income that is recognised by the primary buyout funds, net of PPS, is allocated to HGT and recognised when the right to this income is established. Income from Hg 6 E LP and the renewable energy funds would normally consist of income distributions and these distributions are recognised as income in the financial statements of HGT when the right to such distribution is established.

The accounting policies below apply to the recognition of income by the primary buyout funds, prior to allocation between the Partners:

Interest income on non‑equity shares and fixed income securities is recognised on a time apportionment basis so as to reflect the effective yield when it is probable that it will be realised. Dividends receivable on unlisted equity shares where there is no ex‑dividend date and on non‑equity shares are brought into account when the right to receive payment is established.