HgCapital Trust plc Regulatory News (HGT)

13 Mar 2007 07:02

HG Capital Trust PLC13 March 2007 HgCapital Trust plc Preliminary Results for the year ended 31 December 2006 OVERVIEW London, 13 March 2007: HgCapital Trust plc (or "the Trust"), the Private EquityInvestment Trust managed by HgCapital, the European sector-focused privateequity investor, today announces preliminary results for the 12 months ended 31December 2006. Financial highlights * Total return to shareholders (NAV plus dividend) increase of +21%. * One year total return share price performance of +27% against FTSE All Share of +17%. * NAV increased by 20% to £187 million (2005: £156 million). * Share price growth (total return) over ten-year period of +18% per annum against +8% per annum in the FTSE All-Share Index for the same period. * An investment of £1,000 ten years ago would now be worth £5,390 based on the Company's share price at 31 December 2006, with dividends reinvested, compared with £2,140 for the FTSE All-Share Index. * Dividend of 14p per share (2005: 10p per share). * The NAV has increased to £188 million (746.8p per share) at 28th February 2007; in addition, a further uplift in NAV of £4.4 million (17.5p per share) is anticipated on completion of the sale of Hirschmann, which is subject to cartel clearance. Operational Highlights * Invested £45 million, a new record, in 5 new and follow-on investments (2005: £35 million), including the Trust's two largest ever investments in Visma ( Norway, £382 million EV) and Paragon (UK, £322 million EV). * Another record year of realisations with proceeds of £62.3 million (2005: £52 million). * The Trust made a €21 million commitment to the €300 million Hg Renewable Power Partners fund, as HgCapital consolidated its position as the leading renewable energy Private Equity investor. * The Trust won the private equity investment trust of the year for the second consecutive year at the Investment Week Awards, again demonstrating the consistent strong performance of the company. * The Trust realised £28.2 million from the sale of Castlebeck, a return of 8.6x its initial investment, in a deal recognised by the industry as the UK & Ireland Deal of the Year at the 2006 EVCA awards. Roger Mountford, the Chairman, commented: "HgCapital Trust continues to reward its investors with outstanding andconsistent returns. The Trust delivered a total return to shareholders (in termsof NAV plus dividend) of 21%, while the total return (share price growth plusdividend) was 27%. This performance compares with a total return by the FTSEAll-Share Index of 17%. The Company's Manager, HgCapital, has a long trackrecord of successful investment in mid-market buy-outs. The Board believes thatthis continues to be a fruitful area for HgCapital Trust plc and its investors,who want exposure to an asset class that still offers attractive long-termprospects for growth." For further details: HgCapital Ian Armitage +44 (0)20 7089 7888 Maitland Suzanne Bartch/Peter Ogden +44 (0)20 7379 5151 About HgCapital HgCapital makes private equity investments in the European mid-market. We focuson buyout investments in businesses with enterprise values ranging between EUR50 and EUR 500 million. Our business model combines sector specialization withdedicated, pro-active support to our portfolio companies and the application ofsignificant human resource to each phase of the investment process. We managemore than EUR 2.7 billion for some of the world's most respected institutionaland private investors. We exist to generate superior outcomes for our clients,management teams, vendors and intermediaries. For more information on HgCapital please visit www.hgcapital.com. RESULTS Chairman's Statement I am pleased to report that over the year to 31 December 2006 the Company'stotal return to shareholders (in terms of net asset value plus dividend) was21%, while the total return (share price growth plus dividend) was 27%. Thisperformance compares with a total return by the FTSE All-Share Index of 17%. The Company received £62.3 million from the realisation of investments andreinvested a total of £45.3 million in new and follow-on investments - both newrecords. The Company's net asset value (NAV) per ordinary share grew by 20%,from 621.3p to 743.0p. The share price of HgCapital Trust rose from 583.5p to731.0p. At year-end the market capitalisation of the Company had risen to £184 million.Liquidity in the Company's shares has continued to improve with the result thatthe Company is now well-established as a constituent of the FTSE All-ShareIndex. The Board is recommending a final dividend for the year of 14.0p per share(2005: 10.0p), out of earnings per share of 17.9p (2005: 11.8p). Investment strategy The Company's Manager, HgCapital, has a long track record of successfulinvestment in mid-market buy-outs, which it defines currently as transactionswith an enterprise value between £50 million and £350 million. The Boardbelieves that this continues to be a fruitful area for investment, which, whilstremaining competitive, is largely unaffected by the very large buy-out fundsthat have recently been raised and which, by necessity, must focus on very largedeals. While our Manager's origins lie in the UK market, it has carefully andprogressively grown its footprint in Continental Europe. HgCapital is nowwell-established in the German market, where some other UK private equity firmshave found it difficult to make progress; some 31% of the Company's portfolio byvalue was in Germany at year-end. During 2005 HgCapital established a team tosource opportunities in the Benelux market and opened an office in Amsterdam.HgCapital also made its first investment in the Nordic region, through a publicoffer for Visma. By year-end more than half the Company's portfolio by value wasbased outside the UK, compared with a third a year earlier. The Board believes that this trend will help the Manager to source a regularflow of increasingly varied buy-out opportunities, in spite of increasingcompetition in the private equity market. In 2004 the Manager formed a team to focus on opportunities in renewable poweracross Europe. The Board agreed to participate with other major clients ofHgCapital in investments in this area, in the knowledge that, if the concept wasproven, the Manager was likely to raise a fund which the Board could thenconsider for the Company. A formula was agreed with the Manager to determine theprice at which the Company's investments could be transferred into the fund, ifthe Board decided to do so. Since then it has become generally recognised thatrenewable energy has a large and enduring potential market and during 2006HgCapital successfully raised the largest fund of its kind in Europe. The Boardconsidered carefully the potential for this fund and decided that it would be inshareholders' interests to consolidate all the Company's assets in this area bycommitting €21 million to the fund and transferring existing investments into itat the formula price. 2006 was another very good year for realisations. The Board believes it isinstructive for it, as well as the Manager, to understand clearly how value hasbeen created and we regularly invite the Manager to take the Board through itsanalysis of value creation within portfolio companies. It is pleasing to notethat the major source of value creation is growth in the underlyingprofitability and rating of our investments, rather than financial engineeringor arbitrage. This analysis informs the Board's judgment as to the degree, andnature, of risk within the portfolio. The Manager's strong historic performance and the base which it has for furtherprogress were recognised when the Company was, for the second consecutive year,chosen as Private Equity Investment Trust of the Year in the Investment WeekAwards. We congratulate the Manager and its entire staff for their hard anddedicated work in maintaining the Company's excellent performance. Recognition of the Company's success helps to build liquidity in the Company'sshares, which in turn can help to avoid the shares trading at a discount totheir net asset value. The Board believes it is in shareholders' interests toencourage greater understanding of the private equity market and the potentialbenefits to long-term investors of investing in private equity investmenttrusts, such as HgCapital Trust. To this end the Board was pleased to supportthe Manager's proposal to establish the Initiative for Private Equity InvestmentTrusts (iPEIT) and has agreed to make a small contribution to its running costs,financed by savings elsewhere. We are particularly pleased that other privateequity investment trusts have joined the initiative. Further information can befound at www.ipeit.com. Following an excellent series of realisations achieved between 2004 and 2006 theCompany ended the year with some £36.6 million in liquid resources, a slightlyhigher percentage of net assets than the year before. We took this opportunityto test the market for bank facilities and as a result, we have negotiated a new£25 million borrowing facility with a different lender on more attractive termsthan before. The Company is well-placed to take advantage of the flow of newinvestment opportunities, across a wider geography, that the Manager is bringingforward. The Board remains conscious that to fulfil the Company's objective, itand the Manager should endeavour to keep the Company fully invested in growthopportunities. If circumstances arise when there appears to be surplus capitaland conditions for new investment are unfavourable, the Board will considerreturning capital to shareholders, usually through the market purchase ofshares. It is worth noting in this context that the carried interest, whichforms part of the arrangements between the Company and the Manager, reinforcesthe alignment of interest between shareholders and managers. Accordingly, theBoard is once again asking shareholders at the forthcoming Annual GeneralMeeting to renew the power to purchase shares in the market for cancellation.When conditions for new investment appear favourable, the Board will retain cashto make new investments. Prospects While a large quantity of new money is continuing to flow into the privateequity asset class, supported by liquid credit markets, much of this is beingtargeted at transactions outside the strategy successfully adopted over manyyears by HgCapital and the Company. At the same time, our Manager's strategy,supported by its investment in people and offices to give coverage acrossContinental Europe, is providing a broader pipeline of potential deals, and theresources to bring them to completion efficiently and diligently. The Board remains confident that, for many investors, an allocation to privateequity merits a place in their portfolio, especially where a long-termcommitment can be made. HgCapital Trust has rewarded its shareholders well formore than a decade and the Board believes that it will continue to provideinvestors with an efficient vehicle for gaining exposure to an asset class thatoffers attractive long-term prospects for growth. Roger MountfordChairman12 March 2007 Performance record +--------+------------+------------+--------+--------+------------+---------+---------+|Year | Net assets| Net asset|Ordinary| Gross| Revenue| Earnings|Dividends||ended |attributable| value| share| revenue| available| per| per||31 | to ordinary|per ordinary| price| |for ordinary| ordinary| ordinary||December|shareholders| share| | |shareholders| share| share|| | £'000| p| p| £'000| £'000| p| p|+--------+------------+------------+--------+--------+------------+---------+---------+|1995 | 49,029| 189.1| 140.0| 2,948| 1,478| 5.7| 4.50|+--------+------------+------------+--------+--------+------------+---------+---------+|1996 | 60,313| 232.6| 176.0| 2,717| 1,276| 4.9| 4.50|+--------+------------+------------+--------+--------+------------+---------+---------+|1997 | 66,796| 257.6| 193.0| 3,563| 1,688| 6.5| 4.95|+--------+------------+------------+--------+--------+------------+---------+---------+|1998 | 66,851| 257.8| 208.0| 2,495| 1,359| 5.2| 4.95|+--------+------------+------------+--------+--------+------------+---------+---------+|1999 | 89,863| 346.5| 289.0| 3,901| 2,481| 9.6| 8.00|+--------+------------+------------+--------+--------+------------+---------+---------+|2000 | 103,521| 411.0| 356.5| 7,332| 4,623| 17.9| 14.50|+--------+------------+------------+--------+--------+------------+---------+---------+|2001 | 95,795| 380.3| 294.0| 3,893| 2,420| 9.6| 8.00|+--------+------------+------------+--------+--------+------------+---------+---------+|2002 | 83,837| 332.9| 219.5| 3,528| 2,148| 8.5| 8.00|+--------+------------+------------+--------+--------+------------+---------+---------+|2003 | 99,987| 397.0| 289.5| 7,106| 3,969| 15.8| -|+--------+------------+------------+--------+--------+------------+---------+---------+|2004 | 122,040| 484.5| 451.5| 4,905| 2,649| 10.5| 12.00|+--------+------------+------------+--------+--------+------------+---------+---------+|2005 | 156,487| 621.3| 583.5| 4,963| 2,965| 11.8| 8.00|+--------+------------+------------+--------+--------+------------+---------+---------+|2006 | 187,135| 743.0| 731.0| 7,769| 4,519| 17.9| 10.00*|+--------+------------+------------+--------+--------+------------+---------+---------+ *Final dividend for the year ended 31 December 2005, declared on 13 March 2006,paid on 2 May 2006. Historical total return* performance +---------------------+-----------+--------------+------------+------------+------------+| | One year| Three years| Five years| Seven years| Ten years|| | % p.a.| % p.a.| % p.a.| % p.a.| % p.a.|+---------------------+-----------+--------------+------------+------------+------------+|Share price | 27.2 | 39.3 | 23.2 | 17.4 | 18.3 |+---------------------+-----------+--------------+------------+------------+------------+|Net asset value | 21.4 | 25.8 | 16.3 | 13.7 | 14.5 |+---------------------+-----------+--------------+------------+------------+------------+|FTSE All-Share Index | 16.8 | 17.2 | 8.5 | 3.0 | 7.9 |+---------------------+-----------+--------------+------------+------------+------------+|FTSE Small Cap Index | 20.6 | 18.9 | 11.2 | 5.9 | 8.7 |+---------------------+-----------+--------------+------------+------------+------------+ Based on the Company's share price at 31 December 2006 and allowing fordividends to be reinvested, an investment of £1,000 ten years ago would now beworth £5,390. By comparison £1,000 invested in the FTSE All-Share Index would beworth £2,140. * Total return assumes all dividends have been reinvested. Investment Manager's Review 2006 was another record year for realisations and investments, with the currentportfolio continuing to perform well The Company invests alongside other clients of HgCapital. Typically, theCompany's holding forms part of HgCapital's much larger controlling interest inbuy-out investments of companies with an enterprise value (EV) of between £50million and £350 million. The Investment manager's review generally refers toeach transaction in its entirety, apart from the tables detailing the Company'sparticipation or where it specifically says otherwise. The Company's net asset value increased from £156 million to £187 million duringthe year. This arose from unrealised movements and realised proceeds in excessof the book value of £14.4 million and £20.5 million respectively. This increaseis the result of strong earnings growth and cash generation within theportfolio, as well as a good flow of realisations. We saw strong earnings growth at Hirschmann, The Sanctuary Spa, Elite and BlueMinerva. The Company's quoted investments have also performed well, withRaymarine being realised during the period, strong share price growth in Xtx(Xyratex) and the flotation of ClinPhone. We realised our investment inCastlebeck and have agreed to sell Worldmark, both at values significantly abovetheir opening book values. A minority of the Company's investments performed below expectations, inparticular Eagle Rock, Match and Classic Copyright. These investments have beenwritten down accordingly. During the year, the Company invested a total of £45.3 million (2005: £35million), participating in five new buy-out investments. These new investmentswere made in Visma (Norway, £382 million EV), Paragon (UK, £322 million EV),Surrey (t/a SHL) (UK, £100 million EV), FTSA (Canada, £53 million EV), andSchleich (Germany, €165 million EV). During the year, the Company also made a €21 million commitment to the €300million Hg Renewable Power Partners fund. The fund's focus is on long-terminvestments in renewable power projects using proven technologies, includingwind, small hydro, landfill gas, and waste-to energy in Western Europe. The Company realised record proceeds during the year (including gross incomereceived), amounting to £62.3 million (2005: £52 million). These proceeds aroseprincipally from the sale of Castlebeck and Travelsphere and from the sale ofquoted shares in Raymarine, Xyratex and ClinPhone. Since the period end, we have completed the sales of Worldmark, South Wharf,Luxfer and Bertrams. In aggregate, these realisations have returned proceeds of£6.5 million compared with a December 2006 carrying value of £5.7 million. Inaddition we have agreed to sell the HAC division of Hirschmann, subject tocartel clearance, which is expected towards the end of March. Upon completion,this is estimated to result in proceeds and value in the remaining division of £14.4 million forthe Company against the December 2006 book value of £10 million. Attribution analysis of current year movements in net asset value £'000 Opening net asset value as at 1 January 2006 156,487Gross revenue 7,769Expenditure (3,557)Taxation (1,227)Dividends paid (2,519)Realised proceeds in excess of 31 December 2005 book value (excludes gross revenue) 20,512Net unrealised appreciation of investments 14,407Carried interest (4,737)Closing net asset value as at 31 December 2006 187,135 Realised and unrealised movements in net asset value during 2006 Realised Unrealised Proceeds* Appreciation** Total £'m £'m £'m Castlebeck 18.1 18.1Hirschmann 6.0 6.0 The Sanctuary 5.2 5.2 Elite 3.4 3.4 Xtx 3.0 3.0 Blue Minerva 2.4 2.4 Worldmark 2.2 2.2 ClinPhone 1.3 1.0 2.3Raymarine 0.9 0.9Other 0.2 (1.5) (1.3)Eagle Rock (0.9) (0.9)March Holdings (1.9) (1.9)Classic Copyright (4.5) (4.5) Total 20.5 14.4 34.9 *Realised proceeds in excess of 31 December 2005 book value (excludes gross revenue) **Net unrealised appreciation of investments Strong earnings growth from a diversified, sector-focused portfolio, with anincreasing exposure to Continental Europe At the end of 2006 the Company held a portfolio of 42 Investments (2005: 44), ofwhich the twenty principal investments represented over 90% of the portfolio'svalue. This portfolio of small- and mid-cap stocks combines strong growth with sectorand geographic diversification. Following this series of realisations and new investments, the portfolio atyear-end was relatively young. Around 55% of the portfolio by value had beenacquired within the previous two years, compared with 39% a year earlier. It isthe Company's policy not to revalue any investment upwards until receipt ofaudited accounts for the trading period following acquisition: as a result, some49% by value of the portfolio at year-end was still held at cost against 37% theyear before. Over the last two years, the focus of the portfolio has shifted towardsContinental Europe, where we have seen an increasing number of attractiveinvestment opportunities. As at December 2006 over half the Company'sinvestments by value were located outside the UK compared with under 25% at theend of 2004. The top 20 investments in aggregate have historically grown both revenues andprofits in excess of 20% per annum. The portfolio's valuation increased over theyear to £148.5 million, benefiting from strong profit growth and positive cashflow. Another year of record new investment activity was accompanied by recordrealisations. The Company ended the year with £36.5 million of liquid resourcesor 20% of net assets. Combined with a £25 million borrowing facility theseresources leave the Company well-positioned to exploit new investmentopportunities and to support the growth of the portfolio. Asset class Geographic spread by value Unquoted 72% UK 46% Cash & other assets 20% Germany 31% Quoted 8% Europe Other 10% Benelux 7% North America 5% Ireland 1% Valuation basis Deal type by value Cost 49% Buy-out 90% Earnings 28% Expansion 7% Quoted 10% Renewable energy 1% Written down 9% Fund 1% Net assets 2% Venture 1% Other 2% Sector by value Vintage by value TMT 40% 2006 30% Industrials 29% 2005 25% Consumer & Leisure 13% 2004 17% Healthcare 11% 2003 13% Services 5% 2002 2% Renewable energy 1% 2001 2% Fund 1% 2000 2% Pre-2000 9% Percentages shown are by value Investments During 2006 HgCapital invested a total of £304 million on behalf of itsclients, including £45.3 million on behalf of the Company. Company Sector Activity Deal Type Cost £'000 Visma TMT Accounting and business software Buy-out 13,268 Paragon Healthcare Care homes Buy-out 10,746 Surrey (t/a SHL) Services Psychometric testing and assessment Buy-out 7,534 FTSA Industrials Crash test dummies Buy-out 6,235 Schleich Consumer and Leisure Plastic toy figurines Buy-out 4,634 Hg RPP LP Renewable energy Renewable energy fund Fund 350* New investments 42,767 Schenck Industrials Industrial measuring and weighing systems Buy-out 2,372 Other 127 Further investments 2,499 Total investment by the Company 45,266 * This reflects the net investment in the year following the sale of the Company's renewable assets to the Hg RRP fund Figures below refer to the total size of each acquisition, including debt raisedfrom third parties, made by HgCapital on behalf of its clients, including theCompany. New investments Visma In May 2006, HgCapital completed the £382 million buy-out of Visma, the numberone provider of business software and related services to small and medium-sizedenterprises in the Nordic region. Headquartered in Oslo, with significantrevenues in Sweden, Finland and Denmark, the company provides accounting, resourceplanning and payroll software in addition to debt collection and procurementservices to its customer base of over 200,000 enterprises. Paragon In April 2006, HgCapital completed the £322 million buy-out of ParagonHealthcare Group. Paragon owns and operates small community-based homes foradults with learning disabilities and associated physical disabilities, autisticspectrum disorders, complex needs and acquired brain injury. The companycurrently operates 1,600 beds in 242 homes across England and Wales, making itthe largest operator in its field. Surrey (t/a SHL) In November 2006, HgCapital completed the £100 million public-to-privateacquisition of SHL Group plc. SHL provides world-leading psychometric testingproducts for the workplace in over twenty countries. Psychometric testing isincreasingly accepted as a proven and fair way to recruit and retain talent inan extremely competitive marketplace. SHL has produced consistent revenue growthof 9% per annum for the last five years. FTSA In March 2006, HgCapital completed the £53 million buy-out of FTSA, the globalmarket leader in the design and manufacture of crash test dummies for use in theautomotive and aerospace industries. It also provides associated technicalsupport and laboratory services, and develops and supplies sophisticatedsoftware for computer-simulated crash testing, as well as marketing bespokeengineering services and products to the medical and aerospace industries. Itssales are split evenly between North America, Europe and the Far East. Schleich The €165m buy-out of Schleich was completed in December 2006. Schleich is theleading producer of plastic toy figurines such as farm and wildlife animals,historical characters and The Smurfs. Its products are sold in over thirtycountries, including Germany, the US, the UK and France. Toy figurines are anattractive product offering for retailers as they are purchased on differentbuying occasions throughout the year, in contrast to traditional toy sales'patterns, where typically 50% of sales are made in the two months leading up toChristmas. Hg Renewable Power Partners fund (Hg RPP) The Company made a commitment of €21 million to the Hg RPP fund. Follow-on investments Schenck In June 2006, Schenck completed the acquisition of Stock Equipment Company (USA)Inc, the world market leader for bulk handling and feeding systems forcoal-fired power plants. This gives Schenck exposure to one of the key growthindustries not previously covered. Realisations During 2006 HgCapital realised total proceeds of £323 million on behalf ofits clients, including £62.3million on behalf of the Company. Company Sector Exit route Cost Proceeds+ 2006 return+ £'000 £'000 £'000 Castlebeck Healthcare Trade sale 861 28,177 27,316 Travelsphere Consumer and leisure Financial 3,899 7,932 4,033 Raymarine * Consumer & Leisure Quoted share 61 4,384 4,323 sale PBR Healthcare Trade sale 3,495 2,532 (963) Other*** Liquidation 6,038 211 (5,827) Full realisations 14,354 43,236 28,882 Xtx (t/a Xyratex)** TMT Quoted share 3,823 7,622 3,799 sale ClinPhone * Healthcare IPO 1,079 5,623 4,544 The Sanctuary Spa Consumer & Leisure Recapitalisation 1,948 3,865 1,917 Other 1,877 1,995 118 Partial 8,727 19,105 10,378 realisations Total realisations by the Company 23,081 62,341 39,260 + Includes gross revenue received during the year. * Listed on the London Stock Exchange. ** Traded on NASDAQ. *** Includes entities liquidated during the year that had previously been written down. Figures below refer to the total value of each realisation, including, whereappropriate, repayment of third party debt. Proceeds to clients including theCompany are stated net of any such repayment. Full realisations Castlebeck Castlebeck is one of the UK's largest providers of residential healthcare toadults and adolescents with learning difficulties or severely challengingbehaviour. In July 2006 we sold this investment to Castle Holdings Limited for£255 million. Castlebeck has returned 8.6 times the original investment cost ina deal recognised by the industry as the UK and Ireland Deal of the Year at the2006 EVCA awards. Raymarine Raymarine is the leading global manufacturer of recreational marine electronicproducts. The business was listed on the stock market in December 2004 and wesold our remaining shares in the company in March 2006. This investment hasreturned 4.4 times the original investment cost. Travelsphere Travelsphere is a leading provider of escorted coach tour holidays from the UKto around seventy countries worldwide, focusing on the 45+ age group. We soldthe business to Electra Partners for £155 million in April 2006. This investmenthas returned 2.5 times the original investment cost. PBR PBR is a market leader in the management of complex Phase I and Phase IIAclinical trials of new drugs on behalf of the world's top pharmaceutical andbiotechnology firms. We sold the business to PRA in July 2006 for €85 million.However, our investment was not fully divested: HgCapital clients retain a stakein PRA International, who acquired the business and paid partly in cash, partlyin equity. Partial realisations Xtx (Xyratex) In 2006 we took the opportunity to realise 36% of HgCapital clients' holding inXyratex, the NASDAQ-quoted data storage and network technology business. Thisinvestment has returned 2.4 times the original cost (including the unrealisedvalue). ClinPhone In June 2006, we completed the flotation of ClinPhone on the London StockExchange. ClinPhone is a leading supplier of technology solutions to theclinical trials industry. HgCapital clients have retained a 6.2% stake. Thisinvestment has returned 3.5 times the original cost (including the unrealisedvalue). The Sanctuary Spa The Sanctuary Spa operates the UK's leading women-only day spa and also retailsbeauty products under its brand. During the period the business has beenrecapitalised, enabling cash to be returned to investors. Investment portfolio Company Sector Location Residual Valuation Year of Portfolio Cum. cost investment value Value £'000 £'000 % % 1 VISMA + TMT Europe Other 13,268 12,251 2006 8.2% 8.2% 2 Schenck + Industrials Germany 11,698 11,537 2005 7.8% 16.0% 3 Paragon + Healthcare UK 10,746 10,746 2006 7.2% 23.2% 4 Hirschmann Electronics + Industrials Germany 2,669 10,078 2004 6.8% 30.0% 5 Xtx (t/a Xyratex) ** TMT UK 3,172 9,717 2003 6.5% 36.5% 6 Elite + TMT Benelux 5,749 9,502 2005 6.5% 43.0% 7 Blue Minerva (t/a IRIS) + TMT UK 2,957 7,613 2004 5.1% 48.1% 8 Surrey 1 (t/a SHL) + Services UK 7,534 7,534 2006 5.1% 53.2% 9 W.E.T + Industrials Germany 7,590 6,625 2003 4.5% 57.7% 10 Addison + TMT Germany 6,499 6,509 2005 4.5% 62.2% 11 Sanctuary Spa Consumer & + Leisure UK 631 6,082 1995 4.1% 66.3% 12 FTSA + North Industrials America 6,235 6,008 2006 4.0% 70.3% 13 Clarion Events + TMT UK 4,965 5,704 2004 3.8% 74.1% 14 Sporting Consumer & Index + Leisure UK 5,428 5,428 2005 3.7% 77.8% 15 Hofmann + Industrials Germany 4,747 4,673 2005 3.1% 80.9% 16 Schleich + Consumer & Leisure Germany 4,634 4,640 2006 3.1% 84.0% 17 Worldmark International Industrials UK 2,389 3,214 2000 2.2% 86.2% 18 Rolfe & Nolan TMT UK 238 2,366 1996 1.6% 87.8% + 19 ClinPhone * Healthcare UK 7 2,027 2003 1.4% 89.2% 20 Hoseasons + Consumer & UK 2,197 1,929 2004 1.3% 90.5% Leisure 21 Doc M Healthcare Germany 1,956 1,857 2004 1.3% 91.8% 22 Axiom TMT UK 1,805 1,805 2001 1.2% 93.0% 23 Hg RPP + Renewable Europe 1,725 1,553 2006 1.0% 94.0% energy Other 24 PRA *** Healthcare Benelux 1,478 1,504 2002 1.0% 95.0% 25 Classic TMT UK 6,033 1,486 2003 1.0% 96.0% Copyright + 26 Bertram + Consumer & UK 2,848 1,482 1999 1.0% 97.0% Leisure 27 Weston Fund North 1,867 1,201 1998 0.8% 97.8% Presidio America Capital III 28 South Wharf ^ Industrials Ireland 47 992 1992 0.7% 98.5% 29 Eagle Rock + TMT UK 3,856 916 2001 0.6% 99.1% 30 Orbiscom TMT Ireland 3,063 599 2001 0.4% 99.5% 31 Euroknights Fund Europe 1,455 408 1996 0.3% 99.8% Other 32 Match Healthcare UK 3,854 335 1999 0.2% 100.0% 33 PARC Services Ireland 42 166 1995 0.0% 100.0% 34 ACT Fund Ireland - 40 1994 0.0% 100.0% 35 Orbis * Services UK 3,378 15 1997 0.0% 100.0% 36 Burns TMT UK 3,244 - 2001 0.0% 100.0% 37 SGI + Services UK 1,972 - 1999 0.0% 100.0% 38 Profiad + Healthcare UK 1,653 - 1999 0.0% 100.0% 39 Newchurch Healthcare UK 1,296 - 2000 0.0% 100.0% 40 Azinger Services Ireland 204 - 1993 0.0% 100.0% 41 Luxfer + Industrials UK 46 - 1996 0.0% 100.0% 42 Weston Fund North - - 1995 0.0% 100.0% Presidio America Capital II Total 145,175 148,542 100.0% * Listed on the London Stock Exchange ^ Listed on the Dublin and London Stock Exchange ** Traded on NASDAQ *** Traded on NASDAQ. The shares are subject to dealing restrictions that expire in July 2007 + HgCapital controls more than 50% of the voting equity shares through its management of the Company and other funds Investing in private equity Strong performance in absolute terms and relative to other asset classes Private equity Private equity describes securities issued by private and unlisted companies.The securities are equity and equity-related, enjoying the full rewards andrisks of ownership. Investments can be in early-stage businesses, or provideexpansion capital for profitable growing businesses, and can be used to financemanagement or leveraged buy-outs of established businesses. The objective is toachieve higher returns than public equity over a rolling period of five to tenyears. Investments are typically held for three to seven years and are realisedthrough an initial public offering, a trade sale, or a sale to another financialinstitution. Interim proceeds are sometimes possible through recapitalisations. Investment profile Private equity investments are less liquid than public equities. To compensatefor this feature they offer more control and more attractive returns. Over theten years from 1995 to 2005 UK private equity funds outperformed the FTSEAll-Share Index by over 8% per annum and outperformed every asset class overthis period*. The risk profile of an individual private equity investmentdepends on many factors; the principal ones are the nature of the business, thematurity and stage of the business, its size and the financial structure of thebalance sheet. A diversified portfolio helps to mitigate some of these risks;more important mitigants are the quality of company selections by the privateequity manager and the quality of the management teams running the company. * Source: BVCA Performance Measurement Survey 2005. Advantages of private equity Compared with investment in the public markets, a private equity investor hassignificant advantages: * More investment opportunities: significantly more private than listed companies * Better access to information: the ability to conduct detailed market, financial, legal and management due diligence * More control for the private equity manager over the management of the business and the timing of its sale * Alignment of interest of owners and management, leading to better decision making: the opportunity to act like an owner rather than a fund manager, with the benefit of representation on the Board * Management talent: the ability to attract high calibre management and the alignment of management's interests to the success of the investment through equity participation Private Equity Investment Trusts (PEITs) A Private Equity Investment Trust (PEIT) offers the opportunity to participatein a diversified portfolio of mainly unquoted companies that are generallyvalued at a discount to their quoted peers. By buying shares in a PEIT, whichare freely traded, the investor benefits from liquidity while participating inthe potentially superior returns of a private equity portfolio. The Company'sobjective is to provide shareholders with long-term capital appreciation ratherthan dividend growth. To maintain its status as an investment trust, it isobliged to distribute a proportion of its income by way of a dividend each year.The earnings of a PEIT in any year are affected by various factors, includingthe structure of the underlying investments. Accordingly the revenue earningsper share and the dividend of a PEIT will tend to fluctuate from year to year. APEIT should not be confused with a Venture Capital Trust (VCT) which offers taxadvantages to certain investors but is highly constrained in the companies thatqualify for investment. Advantages of investment via an investment trust PEITsoffer investors liquidity in their shares, which can be traded in variablebargain sizes and at any time. This is of significant benefit to investors whodo not wish to commit to the ten year lock-in and participation required wheninvesting in private equity via limited partnerships. Share price The major driver of a PEIT share price is net asset value (NAV), the growth ofwhich is driven by realisations and by revaluation of the unrealised portfolio,based on the profitability of each underlying investment and market ratings. Theshare price of a PEIT usually tracks NAV but it may trade at a premium ordiscount, depending on the market's view of future realisations and newinvestments, and the investment strategy of the manager. Although not all PEITswill provide high returns, a strong manager with a carefully thought-outinvestment strategy that offers a diversified portfolio of companies across anumber of sectors and geographies can increase the likelihood of success. Publication of net asset value Unquoted investments are revalued twice each year, in December and June, and theNAV is adjusted to reflect these valuations in the following March and Septemberrespectively. The NAV per share of the Company is calculated monthly withrespect to cash, cash equivalents and listed investments in the portfolio, andto reflect any realisations since the previous valuation. The NAV is released tothe public through the London Stock Exchange's regulatory news service on thefourth day of each month. This NAV is then used as the basis for calculation ofthe discount or premium published in newspapers for the following month. Investment manager's strategy To maximise returns from mid-market private equity through sectorspecialisation, with the deep resources required to support pro-active work withthe portfolio. OUR STRATEGY Mid-market HgCapital concentrates on mid-market buy-outs with enterprise values of between£50 million and £350 million. This market comprises a high volume of companieswith proven, reliable track records and defensible market positions. Companiesin this range are small enough to provide opportunities to drive incrementalvalue through organisational changes and operational improvements, but large enough to attract quality management and offer multiple exit options. Pan-regional Whilst investments across all of Western Europe are considered, we focusprimarily on the first-, second- and fourth-largest European markets, namely theUK, Germany and the Benelux region. Our network of local offices, combined withcentralised investment and portfolio committees, optimises our ability to drivestrong performance. Broad coverage HgCapital's dedicated sector teams continue to provide investors with exposureto the substantial majority of private equity activity within its target sizerange and across the relevant geographies. Clear investment criteria When evaluating an investment opportunity, HgCapital applies a rigorous yetcommercial investment selection process. This process governs all investmentdecisions, with the goal of ensuring that only the most attractive investmentsare completed, irrespective of an opportunity's sector or geography. We look forthe following criteria in our investments: * Strong management team or the possibility to replace the existing team with management selected by HgCapital * Leading market positions in growth markets with high barriers to entry * Performance improvement and/or consolidation opportunities * Innovative businesses with stable and proven track records and/or predictable cash flows OUR TACTICS Sector specialisation Well-resourced sector teams seek to combine the domain knowledge and expertiseof a strategic buyer with the flexibility of a financial investor. Our sectorteams (Consumer and Leisure, Healthcare, Industrials, Services and TMT) share asimilar top-down approach to screening their respective industries. Byleveraging on our sector knowledge, we can concentrate our resources onconverting prime opportunities and avoid spending time on transactions of lessinterest or value. In addition, over the last three years we have built a specialist team toidentify businesses that will operate, construct and develop renewable energyprojects in Western Europe. Active portfolio management We undertake intensive, continuous, informed interaction with our portfoliocompanies using dedicated portfolio management executives to develop, executeand monitor value-enhancement strategies for each of our investments. HgCapitalwill typically invest as the lead controlling owner of its portfolio companiesas part of its hands-on approach to management. We appoint HgCapital executivesto our companies' boards to participate in business planning and to work withmanagement when needed. To monitor and analyse our portfolio companiesthroughout the investment's life cycle, we operate a Portfolio Review Committeewhich meets on a monthly basis to discuss our investments' performance. Particular attention is given to those that are recent, underperforming or scheduled for exit. Deep resources We invest substantially in all areas of our business to ensure that high qualityresources can be applied to each aspect of an investment opportunity. Our teamof over seventy is well-positioned to produce high absolute returns over thelong term from a well-diversified portfolio of investments which, we believe,will continue to be superior to the returns generated by comparable publicequity markets. For further information please contact: Roger Mountford - Chairman, HgCapital Trust plc Tel: 07799 662601 Ian Armitage - Chief Executive, HgCapital Tel: 020 7089 7979 Peter Ogden - The Maitland Consultancy Tel: 020 7395 0422 INCOME STATEMENTfor the year ended 31 December 2006 Revenue return Capital return Total return Note 2006 2005 2006 2005 2006 2005 £'000 £'000 £'000 £'000 £'000 £'000 Gains on - - 34,919 37,706 34,919 37,706 investments and government securities Carried interest - - (4,737) (2,976) (4,737) (2,976)Income 2 7,769 4,963 - - 7,769 4,963 Investment 3 (730) (587) (2,191) (1,761) (2,921) (2,348)management fee Other expenses 4 (636) (498) - - (636) (498) Return on ordinary 6,403 3,878 27,991 32,969 34,394 36,847 activities before taxation Taxation on (1,884) (913) 657 528 (1,227) (385)ordinary activities Transfer to 4,519 2,965 28,648 33,497 33,167 36,462 reserves Return per ordinary 17.94p 11.77p 113.74p 132.99p 131.68p 144.76p share The total column of this statement represents the Company's Income Statement.The supplementary revenue and capital return columns are prepared under guidancepublished by the Association of Investment Trust Companies. All recognised gainsand losses are disclosed in the Revenue and the Capital columns of the IncomeStatement and as a consequence no Statement of Total Recognised Gains and Losseshas been presented. All revenue and capital items in the above statement derive from continuingoperations. No operations were acquired or discontinued during the year. BALANCE SHEET as at 31 December 2006 2006 2005 £'000 £'000 Fixed assets Investments held at fair value - Quoted at market valuation 14,255 18,736 - Unquoted at Directors' valuation 134,287 109,504 148,542 128,240 Current assets Debtors 10,005 6,609 Government securities 34,284 24,515 Cash 2,268 867 46,557 31,991 Creditors - amounts falling due within one (7,964) (3,744)year Net current assets 38,593 28,247 Net assets 187,135 156,487 Capital and reserves Called up share capital 6,296 6,296 Share premium account 14,123 14,123 Capital redemption reserve 1,248 1,248 Capital reserve - realised 152,787 122,191 Capital reserve - unrealised 2,985 4,933 Revenue reserve 9,696 7,696 Total equity shareholders' funds 187,135 156,487 Net asset value per ordinary share 743.0p 621.3p CASH FLOW STATEMENT for the year ended 31 December 2006 2006 2005 £'000 £'000 Net cash (outflow)/inflow from operating activities (2,273) 1,542 Taxation recovered 2,666 352 Capital expenditure and financial investment Purchase of fixed asset investments (45,266) (35,376)Proceeds from the sale of fixed asset investments 59,805 48,831Net cash inflow from capital expenditure and financial investment 13,455 14,539 Equity dividends paid (2,519) (2,015) Net cash inflow before management of liquid 12,413 13,334 resources Management of liquid resources Purchase of government securities (111,342) (50,890)Sale/redemption of government securities 100,334 37,246 Net cash outflow from management of liquid resources (11,008) (13,644) Increase/(decrease) in cash in the period 1,405 (310) RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS for the year ended 31 December 2006 Called up Share Capital Capital Revenue Total Share premium redemption reserves reserves capital account reserve £'000 £'000 £'000 £'000 £'000 £'000 At 31 December 2005 6,296 14,123 1,248 127,124 7,696 156,487 Net return from ordinary activities after tax - - - 28,648 4,519 33,167 Dividends paid - - - - (2,519) (2,519) At 31 December 2006 6,296 14,123 1,248 155,772 9,696 187,135 At 31 December 2004 6,296 14,123 1,248 93,627 6,746 122,040 Net return from ordinary activities after tax - - - 33,497 2,965 36,462 Dividends paid - - - - (2,015) (2,015) At 31 December 2005 6,296 14,123 1,248 127,124 7,696 156,487 Notes to the financial statements 1. Principal activity The principal activity of the Company is that of an investment company withinthe meaning of section 266 of the Companies Act 1985 and section 842 of theIncome and Corporations Taxes Act 1988. Basis of preparation The accounts have been prepared in accordance with applicable AccountingStandards and with the Statement of Recommended Practice 'Financial Statementsof Investment Trust Companies' (SORP), dated January 2003 and revised inDecember 2005. All of the Company's operations are of a continuing nature. Associated undertakings Certain venture capital investments deemed to be associated undertakings arecarried at fair value in accordance with the Company's Investments accountingpolicy and Financial Reporting Standard (FRS) 9. Investment income and interest receivable Income from equity investments, including taxes deducted at source, is includedin revenue by reference to the date on which the investment is quotedex-dividend. Where the Company elects to receive dividends in the form ofadditional shares rather than cash dividends, the equivalent of the cashdividend is recognised as income in the revenue account and any excess in thevalue of the shares received over the amount of the cash dividend is recognisedin Capital reserve - realised. Interest income is accounted for on an accrualsbasis. Dividends receivable on equity shares where there is no ex-dividend dateand on non-equity shares are brought into account when the Company's right toreceive payment is established. Management fee and finance costs The annual investment management fee and finance costs are charged 75% toCapital reserve - realised and 25% to the revenue account. This is in line withthe board's expected split of long-term returns, in the form of capital gainsand income respectively, from the investment portfolio of the Company. Expenses All expenses are accounted for on an accruals basis. All administrativeexpenses, excluding the management fee, are charged wholly to the revenueaccount. Expenses that are incidental to the purchase or sale of an investmentare included within the cost or deducted from the proceeds of the investment. Foreign currency All transactions in foreign currencies are translated into sterling at the ratesof exchange ruling at the dates of such transactions. Foreign currency assetsand liabilities at the balance sheet date are translated into sterling at theexchange rates ruling at that date. Exchange differences arising on thetranslation of foreign currency assets and liabilities are taken to Capitalreserve - realised. Taxation Deferred taxation is recognised in respect of all timing differences that haveoriginated but not reversed at the balance sheet date where transactions orevents that result in an obligation to pay more tax in the future, or the rightto pay less, have occurred at the balance sheet date. This is subject todeferred assets only being recognised if it is considered more likely than notthat there will be suitable profits from which the future reversal of theunderlying timing differences can be deducted. Timing differences aredifferences between the Company's taxable profits and its results, as stated inthe financial statements, which are capable of reversal in one or more suitableperiods. Investments The general principle applied is that investments should be reported at "fairvalue" in accordance with FRS26 and the International Private Equity and VentureCapital Association (IPEVCA) valuation guidelines issued jointly by the BritishVenture Capital Association (BVCA) and the European Venture Capital Association(EVCA) in February 2005. Quoted: Quoted investments are designated as held at fair value, which is deemedto be bid market prices. Unquoted: Unquoted investments are also designated as held at fair value and arevalued using the following criteria: (i) Initially, investments are fair valued at cost, including fees and transaction costs. (ii) After the receipt of the first audited financial statements following initial investment, companies are valued on the level of maintainable earnings and an appropriate earnings multiple. A marketability discount is applied to the value attributable to shareholders, ranging from 20% to 30%. (iii) Where more appropriate, investments are valued with reference to their net assets rather than earnings. (iv) Appropriate provisions are made against all individual valuations where necessary to reflect unsatisfactory financial performance leading to diminution in value. Both realised and unrealised gains and losses arising on investments are takento capital reserves. Capital reserves Capital reserve - realised The following are accounted for in this reserve: (i) gains and losses on the realisation of investments (ii) losses on investments within the portfolio where there is little prospect of realisation or recovering any value; (iii) realised exchange differences of a capital nature; and (iv) expenses, together with the related taxation effect, charged to this reserve in accordance with the above policies Capital reserve - unrealised The following are accounted for in this reserve: (i) increases and decreases in the valuation of investments held at the year end; and (ii) unrealised exchange differences of a capital nature. Organisational structure In May 2003, the Company entered into a partnership agreement with HGT GeneralPartner Limited and MUST 4 Carry LP. A limited partnership, HGT LP, wasconstituted to carry on the business of an investor with the Company being thesole limited partner in this entity. Under the partnership agreement, the Company made a capital commitment of itsnon-cash investment portfolio to HGT LP with the result that all fixed assetinvestments are now held through HGT LP. The Investment portfolio on page 14 ofthis report presents the underlying investments held in HGT LP. The income andcapital accruals relating to the investments held in HGT LP are shown theBalance Sheet. Carried interest paid to the Founder Partner is shown on the faceof the Income Statement as it is the first charge on investment gains. The agreement stipulates that the associated income and capital profits, afterpayment of the carried interest and the General Partner share, are distributedto the Company and consequently these amounts (including the associated cashflows) are shown in the appropriate lines within the Income Statement, Cash FlowStatement and the related notes. 2. Income 2006 2005 £'000 £'000 Income from investments UK unquoted investment income 5,370 2,251 UK dividends 82 833 Overseas dividends - 18 5,452 3,102 Gilt interest 2,056 1,692 Deposit interest 95 146 Other income 166 - Underwriting commission - 23 2,317 1,861 Total income 7,769 4,963 Total income comprises: Dividends 82 851 Interest 7,687 4,089 Underwriting commission - 23 7,769 4,963 3. Investment management fee Revenue Capital Total return return return 2006 2005 2006 2005 2006 2005 £'000 £'000 £'000 £'000 £'000 £'000Investment management fee 621 500 1,865 1,499 2,486 1,999 Irrecoverable VAT thereon 109 87 326 262 435 349 730 587 2,191 1,761 2,921 2,348 The investment management fee is levied quarterly in arrears. Investment management fees are charged 75% to capital and 25% to revenue. 4. Operating expenses 2006 2005 £'000 £'000 Custodian and administration fees 197 137 Directors' remuneration 104 98 Auditors' - audit services 27 24 remuneration - non-audit services 4 15 Other administration costs 304 224 636 498 The Company's total expense ratio ("TER") calculated as a percentage of average net assets and including expenses, after relief 1.45% 1.43%for taxation, was: 5. Director's remuneration The aggregate remuneration of the Directors, excluding VAT where applicable, forthe year to 31 December 2006 was £103,500 (2005: £98,000). 6. Ordinary shares 31 December 31 December 2006 2005 The number of ordinary shares in issue at the end of the period on which net asset value per share was calculated was: 25,186,755 25,186,755 Share price 731.0p 583.5p 7. Publication of non-statutory accounts The financial information contained in this preliminary statement does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. 8. The figures set out above have been reported upon by the independent auditor. The comparative figures are derived from the audited financial statements of HgCapital Trust plc for the year ended 31 December 2005, except where restated as disclosed, which have been filed with the Registrar of Companies. The report of the independent auditor for the years ended 31 December 2005 and 2006 contain no qualification or statement under section 237(2) or (3) of the Companies Act 1985. 9. The full annual report and financial statements for the year ended 31 December 2006 will be filed with the Registrar of Companies. 10. The Annual General Meeting of the Company will be held at the offices of HgCapital Trust plc, 2 More London Riverside, London SE1 2AP on Wednesday 25 April 2007 at 12.00 noon. 11. Copies of the annual report will be sent to members shortly and will be available from c/o The Company Secretary, HgCapital Trust plc, Beaufort House, 51 New North Road, Exeter EX4 4EP. 12 March 2007 2 More London Riverside London SE1 2AP This information is provided by RNS The company news service from the London Stock Exchange