HgCapital Trust plc Regulatory News (HGT)

HgCapital Trust plc

ANNUAL Results for the YEAR ended 31 DECEMBER 2017

London, 5 March 2018: HgCapital Trust plc ("the Company"), which provides investors with a listed vehicle to invest in unquoted businesses managed by Hg, today announces its annual results for the year ended 31 December 2017.

CONTINUED Strong NAV performance driven by double-digit revenue and profit growth AND EXITS ABOVE BOOK VALUE

SUMMARY performance

1 Assuming reinvestment of all historic dividends

key Highlights FOR THE YEAR TO 31 december 2017

§ NAV per share of £19.32, a total return of 21.5%.

§ Share price total return of 19.5% to 31 December.

§ Strong revenue and EBITDA growth of 14% and 16% respectively across the top 20 buyout investments (83% of the portfolio) over the last twelve months.

§ Valuation multiple (EV/EBITDA) of 16.4x and debt to EBITDA ratio of 5.4x for the top 20 buyout investments.

§ £224 million of cash returned to the Company and £73 million invested on behalf of the Company (including £12 million as co-investment free of fees and carried interest).

§ Board's range of skills and experience enhanced by the appointment of Jim Strang (Managing Director of Hamilton Lane) and Guy Wakeley (CEO of Equiniti Group plc).

§ New commitments to invest up to £225 million in Hg Saturn and Hg Transition Capital over next 4-5 years, broadening the investment reach of the Company in its chosen sectors.

year to date to 28 FEBRUARY 2018

§ NAV per share of £19.25, primarily reflecting unrealised currency movements since year-end

§ Share price of £17.20.

§ Pro-forma liquid resources post completion of all announced transactions are £181 million (25% of NAV).

§ Pro-forma outstanding commitments, including the new commitments to Hg Transition Capital and Hg Saturn, of up to £667 million (93% of NAV). We expect these to be drawn down over the next four to five years.

Hg's Outlook

§ Strong trading from the businesses, combined with capital returns from exits above book value, continued to drive value for our investors

§ Following a strong year for realisations, Hg expects to see several further exits over the next six months

§ While the primary focus is currently on realisations, Hg continues to invest selectively, capitalising on situations where it has a unique angle and has developed many years' knowledge of the business, and typically building on a strong relationship with a founder or management team

§ Robust trading performance from the underlying businesses continues to underpin Hg's confidence in the quality of these investments

§ Hg's focus on operational improvement, coordinated by its dedicated Operations Innovation team, continues to drive the performance of the network of businesses, and deliver network benefits to these companies

§ This focus will continue to drive value for shareholders in HgCapital Trust plc

Roger Mountford, Chairman of the Company, commented:

"Following an excellent year for returns, the Company is well placed to realise a number of investments, while broadening our investment reach and taking advantage of new opportunities within the Manager's established area of expertise."

- Ends -

The Company's 2017 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). The Company 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 2017

The objective of the Company 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.

The Company provides investors with exposure to a fast-growing network of unquoted investments, primarily in technology and technology-enabled services across Europe.

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

References in this announcement 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 announcement to pounds sterling have been abbreviated to 'sterling'.

Financial highlights

Annualised share price total return over the last 20 years: +14.8%

2017 performance:

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NAV per share

at 31 December 2017 was £19.32, a total return for the year of:

+21.5%

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Net assets

The total NAV of the Company at 31 December 2017 was:

£721m

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Share price

at 31 December 2017 was £17.68, a total return for the year of:

+19.5%

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Market capitalisation

The market capitalisation of the Company at 31 December 2017 was:

£660m

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Total ongoing charges

The total ongoing charges for the year to 31 December 2017:

1.5%

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Full-year dividend

(2016: 46p)

46p

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Please refer to the Director's Report in the full Annual Report and Accounts for further details of the calculation of ongoing charges.

Top 20 investments as at 31 December 2017:

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LTM sales growth

+14%

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LTM profit growth

+16%

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EV to EBITDA multiple

16.4x

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Debt to EBITDA ratio

5.4x

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Balance sheet analysis as at 31 December 2017:

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Liquid resources(22% of NAV)

£160m

Liquid resources are supported by an undrawn bank facility of £80 million. 

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Outstanding commitments(62% of NAV)

£449m

Commitments will be drawn down over the next four to five years (2018-2023), an average cash outflow of c. £90 million p.a.

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

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Strong realisation activity throughout 2017, with further liquidity events since the year end, taking advantage of a buoyant environment for realising value at good prices.

Long-term performance record

Historic record

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

Historical total return performance

The Board's strategic report

Chairman's statement

Following an excellent year for returns, the Company is well placed to realise a number of investments, while broadening our investment reach and taking advantage of new opportunities within the Manager's established area of expertise.

The Company continues to evolve in ways that build on our strengths and Hg's deep expertise and capability. We have today announced not only excellent results for 2017 - a total return in NAV per share of 21.5%, mostly from growth in profits - but also two new ways in which the Board will invest the Company's resources in order to broaden our business while deepening our focus on the business models that have created value for shareholders over recent years.

At the same time, we have taken steps to expand the range of expertise on our Board, in order to be able to support, advise and challenge the Manager across all our activities and in relation to the businesses we hold.

A year ago, we refreshed the contents of the Annual Report, in order to focus it more closely on the essence of the investment opportunity we offer. This year we have gone further both within this report and through our website to present the businesses we own, and the ways in which value is added: our aim is to give shareholders real insights into our strategy and a clearer understanding of how a holding in the Company fits into their portfolio. We have also redesigned this report to add further clarity to our message.

The investment opportunity

The essential message is that we offer shareholders the opportunity to share in the profitability of more than thirty carefully selected businesses, across the technology and tech-enabled service area during periods of growth that we expect to create substantial shareholder value. In aggregate, these businesses are equivalent in scale to some of the largest technology-related groups in Europe; however, our structure enables us to maintain the autonomy of each management team and to incentivise them through co-ownership of the business they manage, while still capturing the network benefits that flow from sharing intellectual property, know-how and feedback from the experiences of other companies in the Hg network.

Working with the management team of each business, the partners and executives of Hg can effect substantial change, without the constraints that often impede listed companies. In 2017, the businesses in which we hold our top 20 investments by value grew revenues by 14%, to an aggregate of £2.8 billion, and EBITDA by 16% to £738 million, achieving an aggregate EBITDA margin of 27%.

Broadening our investment

The Company's approach has been based on making, every four or five years, a commitment to invest in a "vintage" of acquisitions to be identified by the Manager, alongside limited partnership funds raised by the Manager on the same terms from major global institutional investors; we invest with them in each business pro rata to our respective commitments. The Company is thus able to invest in a far wider range of opportunities, and in much larger businesses, than its size would typically allow; we can also hold successful, growing businesses for longer, where value will continue to be created. The Company has also benefited from the much greater resources the Manager can deploy, but without bearing any responsibility to our institutional co-investors.

Following the 2016 commitment of £350 million to invest alongside the Hg 8 Fund, the Company made a further £80 million commitment in February 2017 in relation to the Hg Mercury 2 Fund. In October 2017, both of these vintages began their investment periods and have since made their first acquisitions.

In recent weeks, we have agreed with Hg that the Company will broaden its commitment to invest with Hg in two ways.

First, we have made an initial commitment of £75 million to invest alongside the Manager's new Saturn Fund. We will invest in businesses active in the same technology and tech-enabled activities as the Hg8 and Mercury 2 vintages, with similar business models, but which are larger in scale. The businesses in which the Hg Saturn Fund invests will typically already have an Enterprise Value of more than £1 billion. The Company has over recent years already invested in several companies which have grown to this larger scale, such as Visma, IRIS, Sovos and P&I. The Manager believes the competitive landscape is compelling in the large cap space, with no comparable private equity sponsor in Europe with Hg's level of credibility, knowledge or networks. Through Saturn, Hg 8 and Mercury 2, the Manager is able to target technology investments with enterprise values ranging from £30 million to over £1 billion. We expect to benefit not only from the strong organic growth in these business but also from the very broad experience and insights gained from across the market and which can be shared between established, large players and younger, disruptive businesses.

As the timing of these larger transactions will be less frequent than in our existing business, we will pay no fees on our commitment and will only pay fees once capital is invested; the terms on which we will invest are otherwise broadly similar to our current commitments and we will once again have the benefit of an opt-out, in the event that the Company does not have the funds available when a transaction occurs. Certain very large global institutional investors, who will participate alongside the Company, have also committed to provide funding in the case of the largest acquisitions in Hg Saturn. The Company will benefit from the additional firepower this will give, without taking excessive risk, and may be able to take up co-investment opportunities on which no fees or carried interest will be paid.

The Board wishes to make a further commitment of £75 million to this strategy, taking the aggregate commitment in Hg Saturn to £150 million. We will be one of the largest investors in Hg Saturn. The further £75 million commitment will be conditional on shareholders passing a resolution to amend the Company's Investment Policy to provide more flexibility around the size of our largest investment, by raising the limit on any one investment at acquisition from 15% to 20% of gross asset value; this proposed amendment is referenced below and also in the Notice of AGM. In practice, we anticipate that the equity investment the Company will make into each of these larger deals will be fairly similar in size to the larger investments we will make in the Hg8 vintage, so our business will remain well diversified. We expect the Saturn commitment to be invested over the next four to five years.

Secondly, the Board has committed to invest up to £75 million in businesses that demonstrate the same defensive growth characteristics, and in the same sectors, as under our existing business model, but in the form of Transition Capital. This approach creates new investment opportunities by addressing the needs of founders who may not be ready to give up control of their businesses but are attracted to raising some further capital as a first step to a broader liquidity event in an agreed period of time. These investment opportunities, which will be sourced by the Manager, will involve the Company taking a structured interest, usually in the form of preferred equity. We will have the benefit of contractual protections during our period of ownership and the means to force a redemption of our interest by a fixed date. In the meantime, we will be entitled to a contractual fixed return which will provide additional cover for our own dividend payments. The overall risk-adjusted return is not expected to dilute returns from our traditional buy-out investments. Hg has tracked such opportunities for some time, has a pipeline of prospective investment opportunities and has added to its team providing senior experience on these transactions. We anticipate deploying this commitment over the next three years. The terms are similar to those on our existing investments. As with the Hg Saturn commitment, we will only pay fees once capital is invested.

Composition of the Board

Mark Powell, who has served as a Director of the Company since July 2010 and as its Senior Independent Director since May 2015, has decided to retire from the Board at the forthcoming AGM. Mark has brought to the Board's discussions the experience gained during his long and distinguished career in the City, latterly as Managing Director and then Chairman of Rathbones, one of the UK's leading wealth managers. I and my Board colleagues thank him warmly for his great contribution to the Company's success.

The voice of the wealth management community, who represent the largest group of shareholders on our register, will continue to be heard thanks to Anne West, the former Chief Investment Officer of Cazenove, who joined our Board in May 2014. The Board has decided to appoint Anne as Senior Independent Director, in succession to Mark Powell, with effect from the 2018 AGM.

Every year, the Board carries out a comprehensive review of its own effectiveness. In 2017 we concluded that we should add to the range of skills and experience on the Board. Our aims were to add to our ability to work with the Manager in order to build value in our network of technology-related and tech-enabled businesses, and to be better equipped to monitor and negotiate the increasing number and types of structures through which we invest with the Manager.

We undertook a thorough search, using an experienced headhunter and a board and senior executive recruitment platform. Thanks, I believe, to the Company's very strong performance and reputation we received more than two hundred qualified applications. I am very pleased to report that the Board has appointed two new directors, Dr Guy Wakeley and Dr Jim Strang, with effect from 5 March; both Guy and Jim will offer themselves for re-election at the forthcoming AGM.

Biographical details of all the Board members are set out on pages 102-104 of the full Annual Report and Accounts. Suffice it to say here that, as a whole, the Board already embraces experience in wealth management, institutional fund management, corporate finance and financial structuring, financial management, accounting and audit. With the addition of Jim we gain deep experience of the global market for private equity investment and the structuring of private equity funds and deals; and with Guy, engineering and artificial intelligence, and the rapid development of businesses using technology to derive value from data.

More than ever, your Board will do more than monitor the Manager: we enjoy a healthy and very constructive relationship in which the Board is able to bring all its experience to bear, as the directors of a trading group would, on all the strategic and business issues relevant to the Company and the network of businesses we own in common. An example of the fruits of this relationship is in the discussions we have had with the Manager for some time on the importance of cybersecurity: an insight into this topic is set out below.

The growing impact of technology on business

In my statement last year, I suggested that businesses that do not address, and adopt, technological change are likely to go into decline: investors need to be well briefed about these opportunities and threats and to be able to identify, with confidence, which businesses understand and can exploit these changes.

Hg is well equipped to identify businesses that provide tech-enabled products or services to help their own customers exploit this mega-trend, and in so doing creating value for shareholders. Hg does not invest in early-stage businesses or unproven technology.

We have profited for several years from the shift from the sale of software packages operated in-house, to offering Software-as-a-Service ('SaaS'), using the Cloud for secure delivery, data storage, and access. A number of the businesses in our current portfolio (notably Visma, IRIS, Sovos Compliance, Mitratech, Allocate Software and Intelliflo) are already offering SaaS products and we expect this technological wave to continue to provide us with excellent returns. We also have exposure to other forms of technology-driven business. For example, QUNDIS evolved during our period of investment from a manufacturer of energy meters into offering remote, Cloud-based smart metering that will increasingly form a part of the 'Internet of Things'. CogitalGroup has been formed from the merger of established accounting services and outsourced business processing providers into an integrated services group that will increasingly adopt efficiencies from the use of technology and deliver these efficiencies to its SME customers.

The management of large outsourced databases for customers across a specific industry also offers opportunities for so-called Data Analytics businesses: our investment in Eucon, in the traditionally prosaic business of providing automotive parts pricing data and insurance claims management, offers an opportunity for mining Big Data to create business intelligence of value to customers. Evaluate, operating in the global life sciences industry, is another example of a business which can derive valuable analytics products for its customers from the data it manages.

Share price performance

The attribution analysis on page 35 of the full Annual Report and Accounts shows that increases in profits in our unrealised investments contributed £160 million to the overall 21.5% increase in Net Asset Value in 2017. Higher multiples of earnings contributed £46 million. The fast-growing companies we hold are much in demand and, accordingly, command earnings multiples above the market average. Their fundamentals provide some protection against any future correction in equity market values; and their growth rates mean that the value of these businesses can rapidly recover the impact of any fall in relevant market multiples.

The graphs on pages 8 and 118 of the Annual Report and Accounts show that the Company's shares have again outperformed the FTSE All-Share Index. The twenty-year total return has been 14.8% p.a., more than 8.5% p.a. better than the Index, while the return over five years was 15.6% p.a., beating the Index by 5.3%. These rates of return over long periods achieve our target and demonstrate the superior return that can be earned by a long-term allocation to the Company's shares.

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"The range and scale of commitments we have made to invest with Hg over the next four to five years...reflect our confidence in Hg's well-established business model. The fact that many of the world's largest and most successful investors have made parallel commitments to the Manager's funds vindicates our view that patient, long-term investors should continue to hold an allocation to our Company in their portfolios."

Roger Mountford, Chairman, HgCapital Trust plc

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Proposed dividend

While the Company's assets are managed to achieve long-term growth in shareholder value, the Board recognised last year that in a period of low interest rates and yields, many shareholders wish to have some certainty about likely levels of dividend payments; we said then that we anticipated total dividends in future of not less than the 46 pence per share recommended in respect of 2016. In 2017, for the first time, we paid an interim dividend (16 pence per share) and now recommend a final dividend of 30 pence per share, to make the full year dividend 46 pence in total as envisaged.

Investment activity

Hg's work with management teams, to drive value in our businesses through double-digit growth in earnings, positioned us well to crystallise that value during 2017, when market conditions appeared strongly to favour realisation. Accordingly, we realised cash totalling £224 million for the Company (2016: £135 million), compared with sums invested, at £73 million (2016: £104 million), nearly half of which was to support follow-on investments in strongly performing companies such as Visma and Sovos Compliance. Opportunities to inject additional equity into fast-growing acquisitive businesses we already own enable us to continue to deploy funds, even at times when market conditions in general favour realisations.

At the year-end, the Company had liquid resources of £160 million and outstanding commitments to invest some £449 million over the next four to five years. As I have reported above, the Board has made further commitments to invest over the coming years. If prices come under pressure in future, the Company will be well placed to move quickly to deploy these resources.

At 31 December 2017, cash and liquid funds stood at 22% of Net Asset Value; with further realisations in 2018, we should anticipate our liquidity rising further temporarily before being reinvested. I remind shareholders that the last substantial peak in our liquidity occurred in 2008, when cash and liquid funds represented just over 50% of net assets; the Company was able to take full advantage of the very fruitful conditions for investment that followed. With the new initiatives we have announced, the Company now has four routes by which to deploy its funds across a broad range of businesses within our chosen sectors.

Prospects

The Manager's outlook is set out below. They remain confident that our current portfolio will continue to report strong growth in revenues and profits and that the defensive characteristics inherent in the businesses we hold will protect value, even if macro-economic conditions become more unpredictable. The focus on specific business models will continue to identify businesses with similar characteristics that offer protection against market forces.

Most of the businesses in which we are invested continue to deliver strong revenue growth, improving margins and impressive increases in profitability. This bodes well for continuing value creation and our capacity to defend valuations despite weak equity markets.

The range and scale of commitments we have made to invest with Hg over the next four to five years, combined with their pipeline and ability to identify and track businesses with potential, reflect our confidence in Hg's well-established business model and in the new opportunities from which shareholders can profit. The fact that many of the world's largest and most successful institutional investors have made parallel commitments to the Manager's funds vindicates our view that patient, long-term investors should continue to hold an allocation to our Company in their portfolios.

Roger MountfordChairman2 March 2018

Investment objective and investment policy

The objective of the Company 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.

During the year, the Board, with the assistance of the Manager, has reviewed the Investment Policy and is submitting an amended Investment Policy for approval by shareholders at the 2018 AGM. The only amendment is that, on investment, the maximum allowable investment in a single business is increased to 20%, compared to 15% in the current policy. The Board believes that this change will align the Company with its peers and provide the Manager with additional flexibility to achieve the Company's Investment Objective. A blacklined version of the Investment Policy showing all changes proposed is included at the end of the Notice of Meeting, on page 137 of the full Annual Report and Accounts. Below is the Investment Policy in force for the year ending 31 December 2017.

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

Risk managementThe Company has adopted formal policies to control risk arising through excessive leverage or concentration. The Company's maximum exposure to unlisted investments is 100% of the gross assets of the Company from time to time. On investment, no investment in a single business will exceed a maximum of 15% of gross assets. The Company 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 the Company'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.

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

GearingEach 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. The Company 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.

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

HedgingPart of the Company's portfolio is located outside the UK, predominantly in Northern Europe, and a further part in businesses that operate in US dollars. The Company may therefore hold investments valued in currencies other than sterling. From time to time, the Company 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.

OvercommitmentThe Company may be overcommitted at times in order to ensure that it is more fully invested in the future. The level of overcommitment is regularly reviewed by the Board and Hg.

Liquid fundsThe Company 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 the investment-realisation cycle the Company may hold substantial cash awaiting investment. The Company 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 the Company's investment objective and policy will be made only with the approval of shareholders in a general meeting.

Performance targetsThe Company'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.

In the twelve months to 31 December 2017, the Company's NAV per share increased by 21.5% on a total return basis. In comparison, the FTSE All-Share Index increased by 13.1%. The twelve month total return of the Company's share price was 19.5%.

NAV per share has grown by 10% p.a. compound over the last ten years and 13% p.a. compound over the last twenty years. The share price has seen broadly similar performance growing by 12% p.a. compound over the last ten years and 15% 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.

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

Going concernThe Company'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 the Hg's Review. The financial position of the Company, its cash flows, liquidity and borrowing facilities are described in the Strategic Report.

In addition, note 19 to the financial statements describes the Company'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 the Company 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 the Company will have adequate resources to continue in operational existence for at least the next twelve-month period from the date of this report and be able to meet its outstanding commitments. Accordingly, they continue to adopt the going concern basis in preparing these results.

Long-term viability statement

In accordance with provision C.2.2 of the 2016 revision of the UK Corporate Governance Code, the Directors have assessed the prospects of the Company 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 the Company's viability may vary from year to year, depending on a number of factors, notably its outstanding investment commitments, which currently run until 2021-2022. In addition, the Board believes that it should assess the viability of the Company over a minimum of five years and, accordingly, has elected this year to assess the Company's viability over the five-year period ending December 2022.

In their assessment, the Directors have considered the Company's position with reference to the business model, the balance sheet, cash flow projections, availability of funding and the Company's contractual commitments. This has been undertaken alongside a detailed review of the principal risks and uncertainties associated with the Company, including: performance; regulatory; operational; financial; liquidity; and borrowing, as detailed on page 17 of the Strategic Report of the full Annual Report and Accounts. The Directors recognise the importance of its close working relationship with the Manager and regularly monitor and review Hg's strategy, resources, risks and associated internal controls.

Based on this assessment, the Directors of the Company confirm that they expect the Company will continue to operate and meet its liabilities, as they fall due, during the five years ending December 2022.

Principal risks and uncertainties

During the period under review, the Board has carried out a robust assessment of the principal risks, and controls, facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. This process involves the maintenance of a risk register, which identifies the risks facing the Company and assesses each risk on scale, classifying the likelihood of the risk and the potential impact of each risk to the Company.

The Board has established controls to mitigate against risk faced by the Company. The Audit Committee has delegated authority to regularly review these policies for managing each risk, as summarised below.

PerformanceAn inappropriate investment strategy might lead to poor performance. The Board is responsible for deciding the Investment Policy to fulfil the Company's objectives and for monitoring the Manager's performance in carrying it out. To help manage this risk, the Manager provides an explanation of all investment decisions and the rationale for their selection of sectors and businesses. It also monitors and maintains an adequate spread of investments, within the risk controls set out in the Company's Investment Policy, in order to manage the risks associated with particular countries or factors specific to particular sectors.

LiquidityThe Company predominantly invests in unquoted companies; liquidity in their securities can be constrained, potentially making the investments difficult to realise at, or near, the Directors' published valuation at any one point in time. The Manager has regard to the liquidity of the portfolio when making investment decisions, and the Company manages its liquid resources to ensure sufficient cash is available to meet its contractual commitments.

In the event that, after providing for necessary expenditure, the Company will have insufficient cash resources to fund a new investment, an opt-out provision has been negotiated in connection with the Company's commitment to invest alongside Hg 8, Mercury 2, Saturn and in Transition Capital. This permits the Company to opt out of its obligation to fund a draw-down for certain liquidity or regulatory reasons, in particular, if to do so would result in the Company (i) not having the cash resources to meet any of its liabilities, expenses or obligations to fund its commitments to other funds or investment vehicles of Hg that are reasonably likely to become due within 12 months or (ii) not being able to undertake any share buy-back, in each case subject to certain conditions. These provisions help the Company to manage the risks associated with over-commitment.

At certain points in the investment cycle, the Company may hold substantial amounts of cash awaiting investment, which it may invest in government or corporate securities, or in bank deposits or managed funds. To this end, the Company is invested in Royal London Asset Management Cash Funds. This deploys funds awaiting investment in a highly liquid portfolio of cash, deposits, money market instruments and short-dated government securities.

BorrowingThe Board and the Manager agree that prudent use of borrowing to fund investments can allow the Company to hold a larger and more diversified portfolio and increase rates of return to shareholders. Hg acquires businesses with the benefit of bank borrowing at levels that can be serviced from the cash flows generated within that business. The Board does not currently see any advantage in using a further level of long-term borrowing by the Company, as this would add risk without any certainty of enhancing returns, but anticipates making tactical use of bank borrowing from time to time, in order to remain more fully invested across the investment-realisation cycle.

The Board keeps the management of the Company's resources under frequent review and regularly considers long-term cash flow projections for the Company.

The Company has arranged an unsecured standby facility with Lloyds Bank plc of £80 million to provide funds for investment when necessary; this is available until 30 June 2019. The facility was not utilised during the year and remained undrawn at 31 December 2017. The Directors believe the borrowing facility gives the Board further flexibility in managing the Company's resources, without adding undue risk.

OperationalThe Company has no employees and relies upon the services provided by third parties, notably Hg to which the principal managerial functions have been delegated. The Company is dependent upon the internal control systems of the Manager and the Company's other service providers. The security of the Company's assets, dealing procedures, accounting records and maintenance of regulatory and legal requirements, depend on the effective operation of these systems. These are regularly tested and monitored and an internal control report, which includes a robust assessment of risks, together with procedures to mitigate such risks, is prepared by the Manager and reviewed by the Board and the Audit and Valuation Committee twice each year.

The Company is also an Alternative Investment Fund ('AIF') for the purposes of the Alternative Investment Fund Managers Directive (Directive 2011/61/EU) ('AIFMD') and Hg Pooled Management Limited has been appointed as its Alternative Investment Fund Manager ('AIFM') for the purposes of the AIFMD.

The Board has considered an Assurance Report on Internal Controls (AAF 01/06) as prepared by the Manager, and independently reviewed by Deloitte LLP, for the year ended 31 December 2016. The Board will consider the 2017 Assurance Report when issued later in the year.

RegulatoryThe Board continues to believe that it is in shareholders' interest to retain the tax advantages that flow from meeting the requirements for an investment trust under Sections 1158 and 1159 of the Corporation Tax Act 2010 ('CTA'). As such, the Company is exempt from corporation tax on capital gains realised from the sale of its investments, so the impact of losing investment trust status would be significant. The Board believes the likelihood of this risk occurring is low. The Manager monitors investment movements, the level and type of forecast income and expenditure, and the amount of retained income (if any) to ensure that the provisions of Sections 1158 and 1159 of CTA are not breached. The Company's compliance with the conditions for retaining investment trust status is certified by the Manager at each meeting of the Board.

General changes in legislation, regulation or government policy could significantly influence the decisions of investors or impact upon the markets in which the Company invests.

FinancialThe Company's investment activities expose it to a variety of financial risks that include valuation risk, liquidity risk, market price risk, credit risk, foreign exchange risk and interest rate risk. Further details are disclosed in note 19 to the financial statements, together with a summary of the policies for managing these risks.

Other matters

Socially responsible investmentThe Board has endorsed Hg's policy to invest the Company's funds in a socially responsible manner, as set out below and on their website at http://www.hgcapital.com/responsibility. The Company'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.

The Company has no employees and has limited direct impact on the environment. The Company 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 the Company as it has no employees, all of the Directors are non-executive and it has outsourced all its functions to third party providers. The Company has therefore not reported further in respect of these provisions.

Modern SlaveryThe Company 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 http://www.hgcapital.com/hgcapital-slavery-and-human-trafficking-statement.

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 the Company's leadership are described on pages 102 and 104 of 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, but to do so solely on merit. At the end of the year under review, the Board of Directors of the Company comprised four men and one woman. The Company seeks to enhance diversity and looks for the best qualified male and female candidates. The Manager has an equal opportunities policy and currently employs 78 men and 50 women.

For and on behalf of the BoardRoger MountfordChairman of the Board2 March 2018

Hg's review

Building businesses that change how we all do business

Hg is an investor predominantly in unquoted technology and technology-enabled service businesses.

Our business model combines deep sector specialisation with dedicated portfolio management support. Hg invests primarily in growth companies in expanding sectors via leveraged buyouts across Europe.

Hg's vision is to be the most sought after private equity investor in Europe, being a partner of choice for management teams, so as to produce consistent, superior returns for the Company and other clients and a rewarding environment for our staff.

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

• indirect investments by the Company 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') and HGT Mercury 2 LP) of which the Company is the sole limited partner;

• a secondary purchase of a direct interest in Hg's 6 fund through HgCapital 6 E LP ('Hg 6E'), in which the Company 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 the Company 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 120 to 122 of the full Annual Report and Accounts.

Overview

Introduction to Hg

With close to 130 staff in investment offices in the UK and Germany, Hg has funds under management of over £9 billion serving a range of highly regarded institutional investors, including private and public pension funds, charitable endowments, insurance companies and family offices, alongside the Company. We have progressively invested in and strengthened the business of Hg over the years, to establish a significant competitive advantage.

The Company is the largest client of Hg, which has been contracted to manage the Company's assets since 1994.

The Company offers investors a liquid investment vehicle, through which they can obtain an exposure to Hg's diversified network of private equity investments with minimal administrative burdens, no long-term lock-up or minimum size of investment, and with the benefit of an independent board and associated corporate governance.

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"We focus our investments in software and tech-enabled service & industrial companies with specific business characteristics that we believe have the ability to grow across market cycles and are attractive to future buyers."

Nic Humphries, Senior Partner, Hg

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Investment strategy

Hg primarily focuses on buyouts in technology and tech-enabled businesses focused on end-market clusters with enterprise values ('EV') of more than £30 million to £3 billion predominantly, but not exclusively, in the UK and Northern Europe.

These companies are small enough to provide opportunities for strategic and operational improvement and to offer multiple exit options across market cycles, but with the scale and potential to attract high quality management.

We believe these markets offer a high volume of investment opportunities with proven financial performance and strong market positions.

Clear investment criteria

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.

We seek companies predominantly in technology and technology-enabled services that share similar characteristics, such as: high levels of recurring or contracted revenues; a product or service that is business critical but typically low spend; low customer concentration; high customer loyalty and low sensitivity to market cycles; and often providing a platform for merger and acquisition ('M&A') opportunities. We believe that these companies have the potential for significant performance improvement.

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"Our differentiation is how focused we can be on a few high impact areas that are relevant to all our tech and services companies. The OI team members are experts in their areas, and they work the same topics over and over again from one company to the next."

Amanda Good, Partner, Hg

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Active management of businesses in our network

By virtue of the fact that Hg repeatedly invests in specific business models, our dedicated Operations Innovation ('OI') Team has been able to tailor a differentiated approach to driving value creation during our ownership. Following each investment, our OI Team works with management to focus on a set of operational levers that are key to performance in an Hg 'sweet spot' business model: sales, digital marketing, pricing, customer success, IT and data analytics. For each of these levers, the OI team has codified the Hg experience and best-practices into set 'plays' that are deployed together with management.

The nature of support provided by Hg can take a variety of forms. At a Board level, we often appoint a member of the OI team as a non-executive director responsible for applying active, results-oriented corporate governance.

Beyond the boardroom, members of our OI team provide either direct support through hands-on best-practice project work, or collaborate with management teams to draw on expertise from our proprietary network of specialists and Operating Partners, who each bring a specific, operational specialism to company situations.

One of the most powerful ways the OI team motivates change is through peer-to-peer collaboration. Over the first few months of 2018, for example, 27 M&A executives, 62 CTOs/CIOs and 130 Sales & Marketing leaders will have spent up to two days together essentially sharing and adopting each other's best practices. By way of example, across these Hg Forums: Visma will explain how to build in-house capabilities to complete and integrate 20 acquisitions a year; Allocate will explain to the CTOs how to transition from on-premise to cloud software in less than a year; and Sovos will help sales leaders understand what systems and processes are required to generate $10 million in sales leads in a month.

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"The speakers, the location, the entertainment and most of all, the peers I met at the Hg CEO & Chairman forum, were all first class. They made me feel inspired, excited, pleased and reassured to be backed by Hg."

Geoff Love, Chief Executive Officer of Esendex Group

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Insight

Managing the cybersecurity risk

Businesses are facing an ever-increasing threat to their operations and finances through more frequent, sophisticated and targeted cyber attacks.

These attacks can impair business operations, generating a reduction in productivity and lost opportunity costs. They can also generate direct economic loss (via fines, ransom and fraudulent payments) and reputational damage. In the world of private equity this reputational impact can extend to the fund manager and is a direct threat to shareholder value.

However, it is possible to protect the investment and shareholder value of each company and, in doing so, demonstrate a well-managed business, potentially creating additional value at realisation.

We are very fortunate to have Jason Richards, a very well respected former Chief Information Officer, working directly with the OI team. Over the last year, Jason has created and implemented a standardised 'end to end' cybersecurity assessment for all the businesses in Hg's network, employing industry best-practice frameworks and standards across non-technical (for example, risk management and education) and technical control areas (for example, network protection).

Attaching an overall Cybersecurity Maturity Score to each company provided an effective means to monitor and measure progress within each company and across the network. It also enabled us to benchmark each company against each other.

These insights have assisted us in targeting areas for improvement which have been supported in a number of different ways. For example:

• Organisations that were identified as having an opportunity to improve their management of cybersecurity risk, were provided a predefined 'jump-start' risk register and supporting instructions on how to define and quantify their cybersecurity risks.

• For businesses that find themselves under cybersecurity attack, or suspect they have been attacked, being able to call upon an external emergency incident response provider can be critical in fighting off the attack and/or determining the extent of the breach. We removed any friction associated with acquiring these services by negotiating establishing an agreement with a world class partner, available to all our businesses.

While we are by no means ready to declare victory in the ever-changing landscape of security risks, our businesses have taken a huge leap forward in terms of understanding and readiness for what lies ahead.

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"The threat of cybersecurity impact to any business, regardless of size, is very real and is only increasing as we continue to be more reliant upon online services and as the volume and nature of connected devices continues to grow. Protecting yourself and your business does not need to be a complex task. However you do need to commit to, deploy and maintain effective levels of cybersecurity practices, policies and procedures, alongside layered technology solutions. Critically, an effective understanding of cybersecurity from the board room to every employee, is a cornerstone of any successful defence. Cybersecurity is the responsibility of every employee, not just that of the IT team."

Jason Richards, Operating Partner, Hg

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"A deep bench of colleagues, all working to target specific themes, not only allows us to invest in some great businesses but also to work with some of the most talented executives active in those sectors globally"

Matthew Brockman, Managing Partner, Hg

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Our people

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

This specialisation - both in investment selection and portfolio management - requires significant resources and we have built a business employing close to 130 staff, including over 75 investment and other professionals.

Our people come from a range of backgrounds and experience including private equity, consulting, investment banking, accounting and industry specialists. Supporting these in-house resources, Hg's Operating Partners consist of a group of senior individuals with many years of experience in operational and strategic roles, as well as individuals with strong functional expertise in a variety of areas. In addition to this, they have all worked with Hg and other private equity firms over long periods.

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 ten European countries and the USA. Our partners have, on average, nineteen 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 vibrant culture, allows us to attract and hire the best talent in our industry.

We place a strong emphasis on delivering an experience that will encourage the best candidates to join us.

Improving our ability to identify talentWe have strengthened our talent identification processes on how we can best accelerate the development of our top performers within the business. We believe that this is the basis of effective succession planning.

Employee engagementOur people are highly motivated by, and committed to, delivering outstanding value to the Company, 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 review and compensation structures. Hg works hard to ensure our employees are engaged and we strive to improve levels of engagement, using independent external benchmarks.

Developing future leadersWe are explicit about the behaviours we wish to encourage at Hg and have aligned training, coaching, performance feedback and incentives to our values. This focus includes both broad organisation-wide and leadership competency models, which are used as the basis for performance coaching, development and promotion.

A full description of Hg and our key staff is available at www.hgcapital.com

Sector specialisation

Deep sector focus

In order to find businesses where we can add substantial value, Hg applies a deep sector focus, predominantly targeting buyout investments in technology and technology-enabled service companies.

Hg's sector teams combine the domain knowledge and expertise of a trade buyer - giving them enhanced credibility and the ability to make confident decisions - with the speed of execution and discipline of a financial investor leading to high conversion rates on deals.

This deep sector focus is channelled through a rigorous, research-based investment process; systematically identifying the most attractive growth sub-sectors and business models primarily in Europe; and through repeated investment in them, our deal flow is optimised and our returns improved.

Technology

Technology covers a broad range of markets. Driven by our deep sector approach, Hg's Technology teams focus on specific sub-sectors, including: vertical market application software - particularly delivered via a Software as a Service ('SaaS') model; private electronic marketplaces; B2B media information/publishing; and datacentre operators.

Within these sub-sectors, we have invested in high quality businesses with diverse customer bases, which feature subscription-based business models generating predictable revenues and cash flows. The team regularly conducts top-down research within the wider sector, in order to continue to identify and assess further repeatable investment themes where we can invest time to develop proprietary expertise.

Our highly resourced, dedicated team means that we are well placed to identify, assess and complete investments quickly and thoroughly. We work to bring our experience and expertise to support management teams, aiming to have the knowledge of a trade buyer, coupled with the speed and focused delivery of a financial buyer. The team benefits from the depth and breadth of many years of private equity experience in technology, and is complemented by an extensive network of industry experts and advisers.

Given the breadth of opportunity in European technology, Hg is currently investing in the sector on behalf of the Company and from two funds, Hg 8 and Hg Mercury 2; targeting buyouts in companies with typical enterprise values of over £30 million and up to £1 billion.

Hg Saturn will also invest in this sector in businesses which have already reached significant scale; typically with enterprise values of over £1 billion.

In aggregate, the funds we have to invest across the sector allows us to field significant teams to identify and negotiate investments, while providing a very comprehensive resource for the management teams that we support.

Services

Our investment in Services focuses on companies which provide business-critical services with high levels of intellectual property, large fragmented customer bases, preferably with a repeat or recurrent model and often with an increasing degree of technology enablement. The Services sector is a large and wide-ranging segment which is traditionally split into 'horizontal' business models such as: business process outsourcing, facilities management, or testing and inspection. In contrast, our investment approach concentrates much more on specific end markets and sub-segments, which we believe lead to attractive business model characteristics. We have then invested time to develop a strong understanding of the industry dynamics through identifying service companies that sell into those specific sub-sectors.

We target businesses with leading positions within a niche, typically reflected by strong margins; and we aim to grow and scale these businesses, either organically within existing markets, or through acquisition.

Existing investments include companies that serve a range of industries such as: the leasing and maintenance of business-critical equipment, employment law and health & safety; book-keeping and payroll services; international business expansion services; and insurance distribution. In all of these companies, the improved delivery of service via technology is an important theme.

Industrial technology

Our industrial technology investing is focused on growth businesses in particular in the DACH market, which is characterised by a large number of highly successful, family-owned businesses (the "Mittelstand").

We have earned a reputation as a preferred partner for many of these Mittelstand companies to scale into international businesses.

The Industrial Technology Team, based in Munich, is located in the heart of an economic zone containing numerous high quality, cutting edge, technology-led industrial businesses, many of which have strong national or international positions in a specific niche sector, but

with the opportunity to achieve further scale. Our thematic research within this sector has been concentrated over many years on the characteristics that define a strong industrial technology investment.

As a result, we have developed certain themes and business models that we regard as particularly attractive: aftermarket companies; product champions/niche manufacturers with tech-enabled and mission-critical products; and smart distribution models. These themes are overlaid with specific industrial sub sectors where we have a strong understanding.

Case study - Sequel

Supporting management in delivering organic growth, recurring revenue transition and product expansion

www.sequel.com Sector: Technology Geography: UK

About Sequel Business Solutions

Sequel Business Solutions ('Sequel') is a leading provider of software and services to the Lloyd's of London and the broader insurance markets, headquartered in London with operations in UK and Spain. The company was founded in 1993 and has since grown to become one of the leading insurance software specialists in the UK. Sequel has an attractive customer base, comprising some of the leading, most highly respected companies in the commercial insurance space, which rely on Sequel's core underwriting platform, Eclipse, to run and optimise their operations.

Additionally, the company also provides innovative software solutions for related work streams such as: risk analytics (Sequel Impact); claims processing (Sequel Claims); reinsurance (Sequel Re); and placement (Sequel Origin).

Why did we invest in Sequel?

Hg identified Sequel through origination work within the insurance software segment. As the Hg team was searching for an attractive entry point into insurance technology, Lloyd's and complex insurance segments were identified as particularly attractive niches, within which we identified Sequel as having a strong position, as evidenced by stable relationships with key customers (such as Willis, Brit and Markel) which are seen as technology leaders in the Lloyd's and broader commercial insurance market.

Sequel's core technology offering was of very high quality and, when combined with a strong reputation for service delivery, commanded a premium position.

In addition, innovative new products such as Impact, Claims, Re and Origin were in early commercial stages and could provide significant upside.

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"I would like to thank Hg for being a great partner as we developed Sequel into the leading provider of software to the complex insurance market. Together, we transformed the business."

Mario Garcia, CEO of Sequel

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The investment process

Hg partnered with the management of Sequel, led by CEO, Mario Garcia, in July 2014, and supported his team in the transition of ownership from the founder, as well as helping to execute their strategy to become a clear leader in Lloyd's and build a strong product focused business.

How did we support them and create value?

Sequel has been transformed under Hg's ownership period. Its core Eclipse product set was broadened to a full suite supporting all the complex risk activities of insurers and brokers, including risk aggregation, claims management and re-insurance. The suite was also separated into modular products: for risk (Sequel Impact); claims (Sequel Claims); re-insurance (Sequel Re); and origination (Sequel Origin), allowing more light touch sales and implementations.

The modular product set, combined with a greater commercial focus (including building a professional sales organisation), led to a tripling of customer numbers.

In parallel, Sequel's business model rapidly grew its recurring revenue.

In combination, this allowed Sequel both to grow total revenue by 13% p.a. since initial investment, while doubling the recurring revenue share to nearly two thirds during our ownership.

What was the exit?

Confirming Sequel's highly strategic position in the Lloyd's and complex risk insurance market segments, Hg was approached by Verisk, a listed US data analytics business, in the Summer of 2017. Verisk was looking to gain a footprint in the UK insurance technology market and to access the complex risk insurance segment. The Company received £20 million, at an uplift to the December 2016 book value of 161% and delivered a 5.1x investment multiple and a 77% gross IRR over the investment period.

5.1x Investment return multiple of cost

77% p.a. Gross IRR

Case study - QUNDIS

Establishing a clear technology leader

www.qundis.com Sector: Industrial Technology Geography: Germany

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"QUNDIS and Hg have worked very well together over the last five years taking the company to the next level and increasing its breadth. We very much look forward to working within the new partnership, as we see multiple opportunities for further improving our solution offering."

Dieter Berndt, CEO at QUNDIS

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About QUNDIS

Headquartered in Germany, QUNDIS was created in 2008 from the merger of QVEDIS (previously part of Siemens) and KUNDO SystemTechnik and currently has more than 250 employees. QUNDIS supplies a full data management solution for the housing and utilities industries to collect, measure, and transmit consumption-dependent data for heating and water usage on an apartment unit level. This solution comprises a comprehensive range of sub-metering devices as well as remote data transmission technology including a cloud solution and data management software, serving the SME independent sub-metering supplier and building technology markets across Europe. QUNDIS' products are sold in over 30 countries, with the largest markets being Germany and Italy.

Why did we invest in QUNDIS?

QUNDIS has a robust business model with a proven track record of growth and recession resilience, having delivered 7% revenue CAGR over the period of our ownership from 2012 to 2017. It benefits from a large installed base that generates a recurring and predictable revenue stream with loyal customers driven by the low spend nature of the product.

A significant proportion of sales are replacement-related, also driven by regular upgrades to more advanced read-out solutions. New installations are increasing, due to more rigorous energy efficiency regulations across Europe, leading to the ability for further value creation potential via international expansion in adjacent countries. The business has a high quality, competent management team who re-invested a significant amount as part of the original transaction.

The investment process

Hg initially partnered with QUNDIS in May 2012, representing a continuation of Hg's sector-driven investment strategy, seeking to partner with market-leading industry champions. Hg had been tracking the company prior to a sales process being launched at the end of 2011 and the Munich team had built a strong relationship with the QUNDIS management, enabling them to engage early in the sales process.

How did Hg support them and create value?

Key value drivers during Hg's investment period have been the consolidation of QUNDIS' production facilities into a single new state-of-the-art site in 2013, and importantly the development of a highly-advanced gateway and software solutions to offer a comprehensive, market-leading remote read-out solution. Through its technological leadership and reputation as quality leader, QUNDIS has been able to develop further into new customer segments and service offerings on a truly European scale.

QUNDIS' growth also continues to benefit from broader market fundamentals such as the mandatory actual consumption-based billing (under the European Energy Directive), which Hg identified as a driver when the initial investment was made. Overall, QUNDIS is a great example of tech-enablement transforming a business.

Performance improvement

Since 2012, QUNDIS has broadened its customer base in the core markets of Germany and Italy and has built strong platforms to exploit the growing markets in France and other European countries. QUNDIS has established itself as a clear technology leader, providing some of the most advanced read-out solutions in the industry. We anticipate the enforcement of the European Energy Directive (mandatory installation of smart meters and likely move towards intra-year billing) will contribute to sustained growth rates going forward. In addition, under Hg ownership QUNDIS transitioned into a full solution provider including cloud based data management and read-out software.

As a result, QUNDIS delivered annual sales growth of 7% and annual EBITDA growth of over 15% during our ownership.

What was the exit?

Following QUNDIS' rapid growth and international expansion Hg agreed to the sale of the majority of the company in April 2017 and is looking forward to participating in the next development phase of QUNDIS in combination with the Kalorimeta Group of companies. This transaction totalled £44 million at an uplift to the December 2016 book value of 29%, and delivered a 3.5x investment multiple and a 29% gross IRR over the investment period.

3.5x Investment return multiple of cost

29% p.a. Gross IRRResponsible 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 Investing ('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 who are invested with us.

Across all our investments we look to create quality employment in sectors with low carbon emissions and to add value through revenue growth over the long-term. We want the businesses we invest in to be genuinely focussed 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.

As part of our RI approach, we take an active interest in how our companies manage environmental, social, and governance ('ESG') issues. We encourage, support and stretch the companies we work with to strive for best practice responsible business standards.

Our responsible investing journey

Hg has been a signatory of the UN Principles for Responsible Investment ('UNPRI') since 2012 and since then we have continued to increase our ambitions and ESG commitments. In 2017, we hired our first full time executive dedicated to drive our commitment to responsible investing. As part of this we reviewed and updated our RI framework, policy and approach to set our ambition and ensure we focus on the ESG opportunities and issues most relevant for the types of businesses we invest in. Our new Responsible Business framework forms the foundation of our work moving forward.

A signatory to the UNPRI since 2012.

How we integrate Responsible Investing into our investment process

Investment screening

• When considering potential new investments, we screen them against our exclusion list, which outlines the sectors, businesses and activities in which we will not invest.

• A red flag report identifies high level concerns arising from sectors, geographies and preliminary diligence results.

Due Diligence

• 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.

Ownership

• We take an active approach to managing ESG during our ownership. This starts with an ESG onboarding and maturity assessment within the first months of acquisition to prioritise ESG topics and agree an action plan.

• In 2018, we are conducting a maturity assessment of our existing portfolio to identify areas for improvement where Hg can support the companies to realise their ambitions within and beyond our Responsible Business framework.

This assessment will be updated at least annually.

• We organise face-to-face events for our management teams to share best practice, network and receive support.

Realisation

• Upon realisation, we aim to articulate the increased value from improved ESG performance with case studies and performance metrics. 

Our responsible business framework

Hg's Responsible Business framework outlines key ESG areas of focus and how Hg can support our businesses.

The framework is used to assess prospects both before investment and businesses we own throughout our ownership. It focuses on three key areas:

Essentials

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

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

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

• Data and Cybersecurity, which includes Hg's minimum standards for cybersecurity 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 employees is vital for growth and business success. We look at employees from four aspects:

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

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

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

• Purpose and culture, including appropriate and value driving vision, mission, values, norms and behaviours.

Society

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

• Community engagement including community engagement initiatives, apprenticeships, charitable giving and volunteering.

• Environmental impact - The majority of our businesses have low carbon footprints and minimal impact on the environment. We still encourage them to consider how they can improve their energy use and waste management, as well as reduce business travel.

• Positive relationships with key external stakeholders including customers and suppliers: for example, by responsible pricing and sales and supplier relationships.

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

Responsible investing case studies - Employee engagement

The types of business we invest in are people-centric: they do not operate heavy equipment or run substantial manufacturing sites. The employees are therefore the most important asset across our businesses. Numerous studies show that there is a correlation between employee satisfaction and productivity, profitability and customer loyalty, and that an engaged workforce contributes to a safer, more efficient workplace with lower staff turnover.

Many of our portfolio companies are demonstrating best practice in building an engaged and diverse workforce; here are a few examples:

Citation

Citation provides professional regulatory-driven compliance services to nearly 20,000 clients across a range of specialist areas, including: human resources and employment law; health and safety; ISO accreditation; and staff training. The Company is headquartered in Cheshire and employs over 400 professionals. Citation has been listed in the Sunday Times' UK Top 100 Best Companies to Work for three consecutive years.

Citation is known to be one of Hg's best performing businesses when it comes to employee engagement and satisfaction. Employee engagement is at the heart of the company's dynamic people strategy:

• Valuing its people and showing appreciation: in addition to a flexible and comprehensive benefits package, more unusual perks include: a day off on your birthday; a paid week of leave when you get married; and an extra day off for new grandparents. Staff can nominate one another for annual awards, and long service awards celebrate those who have been part of the team for more than five years.

• Creating a fun, friendly and supportive atmosphere: from virtual 'thankyous' which can be sent to anyone, to social get-togethers, Citation makes fun, friendliness and teamwork a core part of its culture.

• Putting an emphasis on communication: Chris Morris, CEO, does a monthly business briefing for all staff which is available to colleagues in the field and those on leave. It is a forum for all colleagues to pose questions or share updates, and particularly valuable for keeping those not based at head office in touch with what's going on.

• Based on feedback from colleagues, Citation recently launched a new concept of 'Bitesize' learning sessions, to increase knowledge sharing across different areas in the business and increase exposure to the leadership team. The fun and interactive sessions are approximately 30 minutes long and led by Citation colleagues. In 2017, they covered topics such as 'the future' with Citation's CEO, events planning, impactful writing and keeping your loved ones safe and healthy.

• In 2017, Citation initiated a Culture Club to help nurture and protect the company's culture and define the few core values that matter most to employees. The entire firm was involved, and everyone had a say, as the new values "do the right thing", "take ownership and deliver", "fresh thinking" and "the human touch" were defined.

Citation firmly believes that employee engagement improves customer service. Achieving national recognition has also boosted its ability to attract talent, with responses to recruitment posts soaring.

Kinapse

Kinapse is a global provider of expert advisory, capability building and operational services to the world's leading Life Sciences organisations, throughout the drug development life cycle. Its services range across a number of areas including research and development, clinical operations, regulatory services, safety and pharmacovigilance, medical affairs and market access. The Group has offices in the UK, India and the United States and employs over 700 professionals worldwide.

Building a talented, expert, high performing workforce is absolutely key for Kinapse to retain and grow its existing business and win new clients. Kinapse hires thoughtfully and inclusively and places a big emphasis on diversity. With a company culture underpinned by its strong values system, employees are encouraged to be themselves, to perform at their best, and are supported to reach their full potential through development, training and challenging work programmes.

In 2017, Kinapse introduced an enhanced employee engagement programme called Kinapse Employee Engagement Programme, KEEP, which includes a number of initiatives:

• KEEP Learning - A learning and development programme with masterclasses by senior leaders in the organisation on topics such as public speaking and leadership. Individual opportunities for growth are also available through Kinapse's Mentoring Programme and Chairman's Scholarship for Training Award.

• KEEP Listening - Monthly sessions open to everyone, providing an opportunity to spend time with senior management, sharing ideas, suggestions and general feedback. Open, two-way communication is encouraged from top to bottom and if it is a confidential ear that is needed, the KEEP email box is manned by the Head of Talent Management who is there to offer advice, support and encouragement when needed.

• KEEP Giving - A charity and volunteer initiative, driven by champions across various locations, focusing on fund-raising initiatives and giving back to local communities. The K-Day programme encourages employees to spend one work day a year (gifted from Kinapse) supporting a cause close to their heart, either as a volunteer or fund-raiser. Employees' health and wellbeing is also supported and encouraged beyond the workplace with a free eye test campaign, talks from local fitness centres and regular sports socials.

Kinapse believes an engaged workforce is vital to the success and growth of the business and everything it does is underpinned by its values, lived and breathed by the team on a daily basis.

Overview of the year

Net asset value (NAV)

During the year, the NAV of the Company increased by £105.2 million, from £615.8 million to £721.0 million at 31 December 2017.

Attribution analysis of movements in NAV

Analysis of NAV movements

There were a number of underlying factors contributing to the increase in the NAV. Positive impacts were the £125.5 million revaluation of the unquoted portfolio and uplifts of £41.7 million on the realisation of investments compared with their carrying value at the start of the year. Reductions in the NAV included: the payment of £23.1 million of dividends to shareholders and Hg's remuneration (£7.8 million and a £26.6 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 £16.5 million, before the provision for carried interest. The majority of the increase (£160.2 million) relates to increases from profit growth in the underlying investments and £46.0 million from increased ratings.

These were partially offset by £109.1 million of decreases driven by realisations at carrying value net of acquisitions and an increase in net debt of £82.8 million resulting from refinancings that returned cash to the Company and further M&A activity within the portfolio.

Top 20 portfolio trading performance as at 31 December 2017

The top 20 buyout investments (representing 83% of total investments by value) have delivered strong sales growth of 14% and EBITDA growth of 16% over the last twelve months ('LTM').

This demonstrates consistent robust growth with revenues and EBITDA growing on average by 12% p.a. and 16% p.a. respectively over the last three years. The business model characteristics of these companies give us confidence that this double-digit growth can be achieved consistently going forward.

More than 70% of the businesses we own are seeing double-digit revenue growth, and more than 80% of the portfolio has delivered double-digit EBITDA growth over the last twelve months.

Profits have grown at a faster rate than revenues. Investment made over the last few years into the cost base of a number of our companies, for example, to finance increased sales and marketing capabilities, strengthen management and new product development, continues to bear fruit.

We continue to see very robust and consistent double-digit trading performance from Visma, IRIS, Sovos Compliance, Foundry, Allocate Software and Intelliflo in the technology sector, and CogitalGroup and JLA in the Services sector.

Whilst new to the portfolio, Esendex has seen a good start to its life with Hg. Over 2017, we have taken the decision to write down one of our top twenty investments, Radius, and in addition, Frösunda and Kinapse whose operational performance has been below expectations over the year.

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

Valuation and gearing analysis as at 31 December 2017

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; this resulted in an average EBITDA multiple for the top 20 buyout investments of 16.4x (14.2x at 31 December 2016 and 16.0x at 30 June 2017).

There remains a continued shift in the mix of the portfolio to higher growth businesses, in particular in the technology sector, where we hold a number of companies with substantial opportunities to grow their SaaS business.

Seven of the top 20 companies (representing 62% by value) are valued at a multiple of over 16x (Mitratech, Visma, TeamSystem, IRIS, Sovos Compliance, Ullink and Allocate). All have attractive business models, are growing strongly and generating cash, and are in demand from investors. As we noted earlier, we have increased our exposure to Visma and Sovos Compliance during the year.

We continue to take a considered and prudent approach in determining the level of maintainable earnings to use in each valuation. Most holdings have been valued using the LTM earnings to 30 November 2017, 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. 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 where relevant and recent, we will also use M&A data.

Our companies make appropriate use of gearing, with an average net debt for the top 20 of 5.4x LTM EBITDA. Many of our businesses have highly predictable, strong earnings growth and are very cash generative, enabling us to use debt to leverage our returns. Over 2017 we took the opportunity to refinance Visma, A-Plan, Ullink and IRIS as detailed below.

2017 saw significant increases in valuations. These were primarily driven by strong trading performance in the underlying businesses.

Outstanding commitments of the Company

2017 ended with liquid resources of £160 million, supported by an undrawn bank facility of £80 million. Outstanding commitments as at 31 December 2017 were £449 million, as listed below. We anticipate that the majority of these outstanding commitments will be drawn down progressively over the next four to five years and are likely to be partly financed by future cash flows from realisations. Additionally, to mitigate the risk of being unable to fund any draw-down under its commitments to invest alongside certain of Hg's funds, the Board has negotiated a right to opt out, without penalty, of the Company's obligation to fund such commitments where it does not have the funds to do so or certain other conditions exist.

£449m

Total outstanding commitments

£414.4 million

Hg 8 and Hg Mercury 2 commitment. The Company's commitment to invest alongside

these funds will be drawn down over the next four to five years.

£34.7 million

Investment period completed; remaining funds retained for follow-on investment.

Investment portfolio of the Company

1 Includes accrued income.

Sector by value* of our primary buyouts

76% Technology

20% Services

3% Industrial technology

1% Healthcare

Geographic spread by value* of our primary buyouts

47% UK

17% Scandinavia

15% North America

13% Other Europe

8% Germany

Investment vintage by value* of our primary buyouts

6% 2017

29% 2016

9% 2015

22% 2014

34% pre 2014

Analysis by value* of investment return relative to its original cost

87% Above

13% Below

Representing aggregate realised proceeds and unrealised valuations of an investment

*Excluding carried interest provisionInvestments and realisations

Investments 2017

Over the course of the year, Hg has invested a total of £764 million on behalf of its clients, with the Company's share being £73 million.

The vast majority of our investments are generated by establishing and developing relationships with companies in our chosen segments 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 sub-sectors and 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.

Over 2017, the Company has invested £11.5 million (Mitratech and Esendex) by way of co-investment, in addition to its commitment to invest alongside Hg 7 and Hg Mercury 1. This is an attractive way to invest more funds, when available, with no fees or carried interest being payable.

New investments

Mitratech - Mitratech is a leading global provider of legal, risk and compliance software serving multinationals and SMEs across Europe and the US.

This investment by the Technology team follows many years of experience in the regulatory-driven business software space. Mitratech demonstrates many of the business model characteristics that Hg looks for, including: a business-critical product; a high proportion of repeatable revenues; strong customer loyalty; an opportunity for M&A; and a strong management team with a proven track record in both organic and M&A-led growth.

fundinfo - fundinfo is a leading technology platform for fund data and documents publication and dissemination to the global fund management industry (including banks, insurance companies, financial advisors, family offices and platforms), headquartered in Zurich, Switzerland.

fundinfo will join Hg's current network of European headquartered FinTech investments, including Intelliflo (SaaS financial advisor software), Ullink (connectivity and trading software) and the recently exited Sequel (insurance software and analytics).

Gentrack - Gentrack is a publicly listed developer of specialist software for energy utilities, water utilities and airports around the world. The investment in Gentrack helped finance the acquisition of Junifer Systems, a leading provider of utilities software in the UK. The combined product offering of Gentrack and Junifer is well positioned for growth, capitalising on the growing market share of independent energy retailers, the UK smart metering roll-out, and retail competition in water for commercial and industrial consumers. Gentrack also intends to take Junifer's product offering into other geographic markets as a solution for new entrants and SME retailers.

DADA - In October, the Mercury team agreed to acquire a majority stake in DADA, a leading provider of hosting services to SMEs in Italy and the UK as well as other European geographies.

This was acquired as part of a public-to-private transaction from the Italian Stock Exchange and represents the first investment from the Mercury 2 fund. The investment in DADA is another example of the Mercury team's approach to investing in technology infrastructure businesses.

MeinAuto.de - In December, Hg's Munich team led an investment in MeinAuto.de ('MeinAuto'), a leading B2C online platform for new car purchases based in Germany. This investment is the first step in an initiative by Hg to develop a new integrated and technology enabled service provider in the automotive distribution & financing space and is the result of considerable sector work undertaken by Hg in recent years in the automotive services and software spaces with historical investments including Zenith and Epyx.

Further investments

Esendex - Esendex is a leading provider of mission-critical business messaging services across Europe and represents a further investment into the Technology Infrastructure cluster. On completion of the transaction Esendex was merged with an existing Mercury portfolio company, Mobyt, which provides similar business messaging solutions in Italy and France. Esendex demonstrates many of the business model characteristics that Hg looks for, including: a high proportion of recurring revenues from serving a large fragmented base of SMEs, delivering an operationally critical service and the opportunity to back a strong management team.

Visma - In June, Hg announced a further investment in Visma, a leading provider of mission-critical business software to SMEs in the Nordic region, following a decision by KKR to sell its holding in the group. Hg is the lead investor in the new transaction structure which valued the business at NOK 45 billion (£4.2 billion), the largest ever software buyout in Europe.

In 2002, Hg's Technology team 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. Hg has made more than twelve investments in this space over the last fifteen years and more than 150 bolt-on acquisitions over this same period. In total, Hg has made 37 software TMT investments and over 200 bolt-on software acquisitions since 2002, making the firm comfortably the most active European TMT investor over this period.

Sovos Compliance - In November, Hg's Technology team made a further investment in Sovos Compliance by acquiring the minority stake held by Vista.

Sovos Compliance is a global provider of compliance software solutions. The company has performed well since Hg's initial investment in March 2016, with strong organic growth in both revenue and EBITDA.

Further investment since the year-end

DADA - Following the initial acquisition made in October 2017 (see above), Hg announced in February 2018 that it had successfully completed a tender offer for the remaining ordinary shares and would complete a public-to-private transaction of DADA from the Italian Stock Exchange. The Company will have invested a total of approximately £7.1 million in DADA, with other institutional clients of Hg investing alongside the Company through the Mercury 2 Fund.

Further details on investments as at 31 December 2017 can be found on pages 48 to 70 of the full Annual Report and Accounts.

Realisations 2017

Over the course of the year, Hg has returned a total of £1.5 billion to its clients, including £224 million to the Company.

It was a very active period for realisations. We have made several references to 'frothy' markets over the past year and this has helped inform our approach to selling investments, whilst also carefully considering our appetite for selling versus the benefits of remaining invested in selected businesses for longer.

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 the Company, and we will continue to assess further opportunities here.

Exits

Zenith - In March 2017, we completed the sale of Zenith, the largest independent vehicle leasing business in the UK, to Bridgepoint in a transaction totalling £750 million. This transaction delivered a 2.9x investment multiple and a 46% gross IRR over the investment period. The sale of Zenith resulted in an uplift of 23% over the carrying value of the investment at 31 December 2016.

QUNDIS - In May 2017, the Munich team completed the sale of QUNDIS, a leading provider of sub-metering solutions in Europe, to a German investment group, KALORIMETA, a leading service provider of climate-intelligent solutions in the buildings sector, for a total enterprise value of c. €400 million. This transaction delivered a 3.5x investment multiple and a c. 29% gross IRR over the investment period, with Hg retaining a minority position in the combined group. The sale of QUNDIS resulted in an uplift of 29% over the carrying value of the investment at 31 December 2016. A case study of this investment appears above.

Zitcom - In June 2017, the Technology team completed the sale of Zitcom, a Danish hosting and cloud solutions provider operating in the SME segment, to Intelligent, a Belgian headquartered provider of hosting services. This transaction delivered a 3.3x investment multiple and a 141% gross IRR over the investment period. The sale of Zitcom resulted in an uplift of 105% over the carrying value of the investment at 31 December 2016.

Parts Alliance - In June, Hg announced that it had agreed the sale of Parts Alliance, a UK automotive aftermarket parts distributor, to Uni-Select Inc., a listed Canadian distributor of automotive refinish and industrial paint products and aftermarket parts. The transaction had a value of £205 million, and delivered a 2.0x investment multiple and a 19% gross IRR over the investment period. The sale of Parts Alliance resulted in an uplift of 46% over the carrying value of the investment at 31 December 2016.

Valueworks - In July, we completed the sale of Valueworks, a provider of a private SaaS platform for procurement and contract management in the social housing sector, to Inprova, a provider of procurement services for social housing. This was for a nominal sum and will not generate any proceeds to the Company.

e-conomic - In June, we announced that the Technology team had agreed the sale of the Hg 6 vintage investment in e-conomic to Montagu and ICG, realising additional proceeds of £220 million to clients, including £33 million to the Company. The sale of e-conomic resulted in an uplift of 33% over the carrying value of the investment at 31 December 2016, delivering an overall return of 2.7x cost and a 29% gross IRR.

Sequel Business Solutions - In August, we completed the sale of Sequel Business Solutions ('Sequel'), a provider of software and services to the Lloyd's of London and the broader insurance markets, to Verisk Analytics (Nasdaq: VRSK), a leading data analytics provider serving customers in property/casualty insurance, natural resources, and financial services, headquartered in the USA. This transaction delivered a 5.1x investment multiple and a 77% gross IRR over the investment period. The sale of Sequel resulted in an uplift of 161% over the carrying value of the investment at 31 December 2016. A case study of this investment appears above.

Mainio Vire - In June 2016, we announced the sale of Mainio Vire, a provider of elderly care, mental health and home services in Finland, to Mehiläinen, a private provider of social and health care services, also based in Finland. Hg retained a small residual stake in this company which was sold in August 2017, returning a further £3.8 million to the Company.

Realisation since the year-end

Ullink - In November 2017, the Technology team announced that it had received a definitive binding offer from Itiviti, a company backed by Nordic Capital, to acquire Ullink, a leading global provider of electronic trading and connectivity solutions to the financial community. This proposed sale is subject to French workers' council consultations, and customary approvals, such as regulatory clearances. The sale of Ullink is expected to return £24 million to the Company, delivering a 3.0x investment multiple and a 35% gross IRR over the period.

Refinancings

Visma - In April 2017, the Technology team completed the refinancing of Visma, a leading provider of mission-critical software to SMEs in Scandinavia, returning proceeds of £94 million to Hg clients, including £9.2 million to the Company.

A-Plan - In March 2017, the Services team completed the refinancing of A-Plan, a UK based distributor of motor and household insurance policies to SMEs and individuals. This returned £52.3 million to Hg clients, including £5.2 million to the Company, representing a 35% return on the original investment made in 2015.

Ullink - In May 2017, the Technology team completed the refinancing of Ullink, a global provider of electronic trading applications and connectivity to the financial community. On completion, this returned £43.8 million to Hg clients, including £4.3 million to the Company, representing a 43% return on the original investment made in 2014.

IRIS - In October, the refinancing of IRIS, a provider of business-critical software and services to SMEs in the UK, was completed. This returned £50 million to Hg clients, including £7.5 million to the Company. Since 2011, IRIS has returned 57% on the original investment made.

Refinancing since the year-end

JLA - In January, the Services team completed the refinancing of JLA, a provider of laundry and catering services, returning £25 million to Hg clients, including £3.8 million to the Company.

JLA has now returned 211% on the original investment made in March 2010.

Summary of investment and realisation activity

Outlook

2017 has been a successful year for Hg in many ways but particularly in terms of a combined focus on driving and crystallising value across our network of portfolio companies.

This has been primarily underpinned by strong trading across the unrealised portfolio, alongside a series of realisations throughout the year completed at attractive valuations, especially relative to prior book value. In terms of our outlook for 2018, we expect the velocity of Hg realisations to continue at a broadly similar pace, with a number of exit processes already underway.

Over the year, and very consciously given current market conditions, Hg has focused on being a material net seller; realising in cash almost double the amount invested over the previous 12 months. This has generated c.£1.5 billion to our clients, including £224 million to the Company, from seven exits and four refinancings. The largest of these was in relation to the sale of Zenith, announced in January, and QUNDIS, which completed in May. Strong performance over the period has continued to demonstrate the attractiveness of Hg portfolio companies to both trade and financial buyers, as evidenced by the recent sale of Ullink, announced in November 2017, at a multiple of 3.0x original cost and a gross IRR of 35%. We anticipate returning further capital over the next six to 12 months.

Trading during 2017 has continued to generate double-digit revenue and EBITDA growth across the businesses we own. Given their defensive characteristics and our focus on protected business models, we believe our investments are well positioned to see strong growth on an absolute and relative basis going forward, even if macro-economic conditions deteriorate over the coming months. This is reinforced by our historic performance during the financial crisis post-Lehman, when our businesses continued to grow both revenues and EBITDA in aggregate throughout the period from 2008 to 2010, without a down year.

Despite the focus on realisations, Hg has continued to invest selectively over the last 12 months, capitalising on situations where we have a unique angle and have built many years of knowledge of the business, and typically building on a strong relationship with a founder or management team. Despite the heat of the current market, we do continue to see exciting and attractive investment opportunities in our target geographies and sub-sectors, just as we did in the closing stages of the last upwards cycle in 2005 to 2008.

This led to five new investments over the course of 2017: Mitratech, a global provider of regulatory tax compliance software; fundinfo, a technology platform for fund data and documentation; Gentrack, a publicly listed global developer of specialist software for energy utilities, water utilities and airports; DADA, a provider of hosting services in Italy and, most recently, MeinAuto, a leading B2C online platform for new car purchases based in Germany. In addition to these new investments, significant further capital was deployed into three businesses we know well: Visma, Sovos Compliance and Esendex.

In this type of market environment, we believe that the clarity of our investment strategy continues to confer a number of clear advantages to a disciplined buyer. Specifically, we will continue to focus on investing in businesses that provide a business-critical product or service, to a fragmented customer base, and which benefit from strong contracted or recurring revenues. This should enable us to identify opportunities with the appropriate business model to generate strong, risk-adjusted returns for our clients. With the addition of the Saturn Funds and Transition Capital, we are able to maintain the clarity of our investment strategy as described, while broadening our opportunity set of potential investments and adding to the scale and reach of our network within European technology.

During 2017, we have continued to consider the UK's forthcoming exit from the European Union and our prognosis remains that this will have a relatively limited impact on our investments, especially given the characteristics of our businesses, their geographic profile and their relatively protected nature. Hg's pan-European presence and office in Germany (since 1999) also offers flexibility in terms of the breadth of our investment focus and general approach. More broadly, the post referendum environment has seen a general unwinding of historic currency losses on non-sterling investments across our funds, slightly benefiting valuations over the year. We have now realised nine portfolio companies since the Brexit vote at the end of June 2016, six of which were based in the UK.

Finally, our focus on specific operational improvements in these areas of investment focus, aligned with the efforts of our dedicated and large internal 'OI' team, also means that we believe we can continue to generate meaningful long-term value in a number of particular areas across the portfolio on a repeatable basis, irrespective of the challenges of the broader macro-environment. From pricing analysis and customer satisfaction to cyber security, these portfolio related initiatives will continue to remain an area of real focus going forward.

______________________________________________________________________________________________________ 

Overview of the underlying investments

held through the Company's limited partnerships

1 Investment through HGT 7 LP and co-investment participation through HGT LP.

2 Investment and co-investment participation through HGT LP.

3 Investment through HgCapital Mercury D LP and co-investment participation through HGT LP.

4 Including accrued income but before the provision for carried interest of £82,911,000.

Non-Statutory Accounts

The financial information set out below does not constitute the Company's statutory accounts for the years ended 31 December 2016 and 2017 but is derived from those accounts. Statutory accounts for 2016 have been delivered to the Registrar of Companies, and those for 2017 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 the Company is investment. The Company 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 November 2014 and updated in January 2017. All of the Company's operations are of a continuing nature.

The Company has considerable financial resources and, as a consequence, the Directors believe that the Company is well placed to manage its business risks. After making enquiries, the Directors have a reasonable expectation that the Company will have adequate resources to continue in operational existence for the foreseeable future.

Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.

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

3. Organisational structure and accounting policies

Partnerships where the Company is the sole limited partnerThe Company entered into six separate partnership agreements with general and founder partners in May 2003 (subsequently revised in January 2009), January 2009, July 2011, March 2013, December 2016 and February 2017; at each point an investment holding limited partnership was established to carry on the business of an investor, with the Company 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 and HGT Mercury 2 LP (together the 'primary buyout funds') is to hold all the Company's investments in primary buyouts. Under the partnership agreements, the Company made capital commitments into the primary buyout funds, with the result that the Company 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 above. The underlying investments that are held indirectly are included in the overview of investments above.

Consolidated financial statements have not been prepared because the Company 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 the Company is a minority limited partnerIn July 2011, the Company 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 the Company is now a limited partner alongside 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 above.

The Company 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 above.

Priority profit share and other operating expenses, payable by partnerships in which the Company 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 23) is entitled to appropriate, as a first charge on the net income of the funds, an amount equivalent to its priority profit share ('PPS'). The Company 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 the Company. 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 23) 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 the Company, when the right to these returns is established.

Accordingly, the Company'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 the Company 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 the Company 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.

Income from listed equity investments, including taxes deducted at source, is included in revenue by reference to the date on which the investment is quoted ex-dividend. Where dividends are received in the form of additional shares rather than cash dividends, the equivalent of the cash dividend is recognised as the income in the revenue account and any excess in the value of the shares received over the amount of the cash dividend is recognised in the capital reserve - realised.

ExpensesAll expenses are accounted for on an accruals basis. All administrative expenses are charged wholly to the revenue account.

DividendsDividend distributions to shareholders are recognised as a liability in the year that they are approved unconditionally.

Current and other non-current assetsFinancial assets and financial liabilities are recognised in the Company's balance sheet when the Company becomes a party to the contractual provisions of the instrument. Trade receivables are stated at nominal value. Appropriate allowances for estimated irrecoverable amounts are recognised in the revenue return on the income statement.

Cash comprises current accounts held with banks.

Foreign currencyThe functional and presentation currency is pounds sterling, reflecting the economic environment in which the Company predominantly operates. All transactions in foreign currencies are translated into sterling at the rates of exchange ruling at the dates of such transactions and the resulting exchange differences are taken to the capital reserve - realised. Foreign currency assets and liabilities at the balance sheet date are translated into sterling at the exchange rates ruling at that date and the resulting exchange differences are taken to the capital reserve - unrealised.

TaxationIncome taxes represent the sum of the tax currently payable, withholding taxes suffered and deferred tax. Tax is charged or credited in the income statement. Deferred tax is recognised on all timing differences at the reporting date. These timing differences arise from the inclusion of income and expenses in tax assessments in periods different from those in which they are recognised in the financial statements.

InvestmentsThe general principle applied is that investments should be reported at 'fair value', in accordance with Sections 11 and 12 of FRS 102 and the International Private Equity and Venture Capital ('IPEV') Valuation Guidelines, December 2015 edition. Where relevant, the Company applies the policies stated below to the investments held by HGT LP, HGT 6 LP, HGT 7 LP, HGT 8 LP, HgCapital Mercury D LP and HGT Mercury 2 LP, in order to determine the fair value of its investments in these limited partnerships.

Purchases of investments are recognised on a trade date basis. Sales of investments held through the primary buyout funds are recognised at the trade date of the disposal. Sales from the investments in Hg 6 E LP and the renewable energy funds would normally consist of capital distributions and these distributions are recognised as a realisation when the right to such distribution is established. Proceeds are measured at fair value, which is regarded as the proceeds of sale less any transaction costs.

Quoted: Quoted investments are held at fair value, which is deemed to be their bid price.

Unquoted: Unquoted investments are also held at fair value and are valued using the following guidelines:

(i) initially, investments are valued at the price of recent investments less fees. Subsequently, investments are valued based on (ii) to (iv) below;

(ii) the level of maintainable earnings or revenue and an appropriate earnings or revenue multiple, unless (iv) is required;

(iii) where more appropriate, investments can be valued based on other methodologies, including using their net assets or discounted cash flows, rather than on their earnings or revenue; and

(iv) appropriate fair value movements are made against all individual valuations where necessary to reflect unsatisfactory financial performance or a fall in comparable ratings.

Limited partnership funds: these are investments that are set up by a manager in which the Company has a direct investment, but is not the sole limited partner and does not hold a majority share. These investments are valued at fair value, based on the Manager's valuation after any adjustment required by the Directors.

Liquidity funds: these are short-term investments made in a combination of fixed and floating rate securities and are valued at the current fair value as determined by the manager of the fund. They can be realised at short notice.

Derivative financial instruments: derivative financial instruments are held at fair value and are valued using quoted market prices for financial instruments traded in active markets, or dealer price quotations for financial instruments that are not actively traded.

Both realised and unrealised gains and losses arising on fixed asset investments, financial assets and liabilities and derivative financial instruments, are taken to the capital reserves.

Capital reserves

Capital reserve - realisedThe following are accounted for in this reserve:

(i) gains and losses on the realisation of investments;

(ii) attribution of gains to the founder partners for carried interest;

(iii) losses on investments where there is little prospect of realisation or recovering any value;

(iv) realised exchange differences of a capital nature; and

(v) expenses, together with the related taxation effect, charged to this reserve in accordance with the above policies.

Capital reserve - unrealisedThe following are accounted for in this reserve:

(i) increases and decreases in the valuation of investments held at the year end;

(ii) increases and decreases in the valuation of the loans to general partners; and

(iii) unrealised exchange differences of a capital nature.

Critical accounting estimates and key sources of estimation uncertaintyThe preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reported year. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results may ultimately differ from those estimates.

The estimates and assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

The key accounting estimate is in respect of the determination of the fair value of financial assets classified as fair value through profit or loss (FVTPL). The methodology used in determining fair values is disclosed above. An attribution analysis of movements in the fair value of investments can be found on page 35 of the full Annual Report and Accounts and an analysis of the trading performance and valuation and gearing analysis of the top 20 buyout investments by value can be found on pages 36 and 37 of the full Annual Report and Accounts. A sensitivity analysis to equity price risk can be found in note 19.

All income that is recognised by the primary buyout funds, net of PPS, is allocated to the Company and recognised when the right to this income is established. This income and PPS is analysed further below.

5. Priority profit share and carried interest

The priority profit share payable on HGT LP, HGT 6 LP, HGT 7 LP, HGT 8 LP, HgCapital Mercury D LP and HGT Mercury 2 LP rank as a first appropriation of net income from investments held in these partnerships respectively and is deducted prior to such income being attributed to the Company in its capacity as a Limited Partner. The net income of HGT LP, HGT 6 LP, HGT 7 LP, HGT 8 LP, HgCapital Mercury D LP and HGT Mercury 2 LP earned during the year, after the deduction of the priority profit share, is shown on the income statement. Details of these arrangements are disclosed in the Directors' report on page104 of the full Annual Report and Accounts.

The terms of the above priority profit share arrangements during 2017 were:

In addition, priority profit shares are payable on partnerships where the Company is a minority limited partner. These amounts are initially and indirectly funded by the Company through the amounts invested in these partnerships and these amounts are recognised as unrealised losses in the capital account in the income statement.

In years in which the funds described in note 5(a) have not yet earned sufficient net income to satisfy the priority profit share, the entitlement is carried forward to the following years. The priority profit share 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 the Company. Such loan

is only recoverable from the general partner by an appropriation of net income. Until sufficient net income is earned,

no value is attributed to this loan and hence an unrealised capital loss is recognised and reversed if sufficient income is subsequently generated.