HgCapital Trust plc Regulatory News (HGT)

HgCapital Trust plc

Interim Management Statement

8 October 2014

HgCapital Trust plc (the 'Trust'), today issues its Interim Management Statement in accordance with FCA Disclosure and Transparency Rule 4.3. This statement relates to the period from 1 July 2014 to 7 October 2014 and incorporates the Trust's calculation of its Net Asset Value (NAV) at 30 September 2014, in the same form as is issued following the end of each month. The NAV at 30 September 2014 is based on the valuations of unquoted investments as at 30 June 2014, as set out in the interim report issued on 21 August 2014, with any subsequent investment completed by the date of the announcement accounted for at cost; in addition, adjustments are made for capital and income realisations, exchange rate movements, changes in the value of quoted securities, dividends payable and expenses incurred during the period to 30 September 2014.  

Performance

The Manager's aim is to achieve returns in excess of the FTSE All-Share Index over the long term, but the Trust is not managed so as to reflect short-term movements in the Index.

At 30 September the Trust's NAV per share was 1,186 pence. Between 30 June and 30 September 2014, the NAV total return (NAV plus dividend) was -1.0%, largely driven by adverse foreign exchange movements and expenses: the reduction in value of the euro against sterling reduced NAV by 9.5 pence per share, or -0.8%, in the period.

At 30 September the Trust's share price of 1,040.0 pence represented a discount of 12.3% against the NAV per share. The Trust's share price (on a total return basis) increased by 5.2% over the three months to 30 September 2014, in a period when the FTSE All-Share Index decreased by 1.0%.

These calculations of NAV are based on valuations of the portfolio as at 30 June 2014, using market multiples at that date, and therefore do not reflect changes in the ratings of comparable listed companies between 1 July 2014 and 30 September 2014. The book value of the unquoted portfolio will next be reviewed, as usual, at 31 December 2014, taking account of each company's maintainable earnings and ratings of comparable businesses in the relevant listed markets at that time, in accordance with IPEV guidelines.

The table below represents the performance at month end with net income reinvested.  All information is at 30 September 2014 and is unaudited.

Sources: HgCapital, Factset

Activity during the period

Investment Environment

The views of the Board and the Manager on the current investment environment are largely unchanged from the Interim Report and Accounts published in August 2014.

· The recovery in the UK economy has continued to develop, with current growth rates out-performing other major developed economies, including the US, Germany, France and Canada.

· Despite this positive lead indicator, the European recovery is still mixed and the Manager remains cautious and disciplined in its investment approach.

· The investment environment for private equity has latterly shown partial signs of a return to the exuberance of the mid-2000s boom period, particularly in terms of pricing and leverage levels but also evident in accelerated auction processes, which we have consciously avoided. There has also been an increase in trade buyer activity, with substantial cash balances in the corporate sector often helping to drive higher acquisition prices.

Over the past nine months, the Trust has both deployed capital and realised investments. The Manager believes that within its sectors of expertise it can continue to find pockets of opportunity to acquire market leading businesses at reasonable prices, usually where there has been the opportunity to build relationships with such companies over many years before making an investment.

The vast majority of investments made in 2014 have been generated on a proprietary basis following many years of sector research. Consistent with this, the Manager has avoided full auction processes wherever possible. A deep sector focus is used by the Manager to identify high quality growth companies in sub-sectors driven by fundamental long-term factors. The increasing penetration of internet-based transactions for businesses is an example identified many years ago.

Trade buyers, financial buyers and more recently, public markets, continue to show an interest in a number of the Manager's portfolio companies, as a result of their growth and market positions and therefore realising them by way of an IPO in public markets is also an option. The Manager believes there will be further opportunities in the medium term to continue realising investments as it has done consistently across market cycles.

New Investments

Between 1 July 2014 and the date of this announcement, the Trust has completed two new buyout investments alongside other clients of the Manager, deploying a total of £44.4 million.

In April, HgCapital announced a re-investment in Visma (completed in August), a leading software and BPO services business in the Nordic region, following a decision by KKR to sell part of its majority holding in the group; HgCapital exercised its rights to sell the stake held in its Hg5 fund and by the Trust, on the same terms as KKR's realisation. HgCapital has reinvested £409 million from its Hg7 fund and the Trust for a 31% stake in Visma, valuing the business at a total enterprise value of NOK 21 billion (£2.1 billion). HgCapital is a co-lead investor in the new transaction structure, alongside KKR and Cinven, who each now hold 31%. Cinven is committing capital to the business for the first time. The Trust contributed a total of £40.0 million to the re-investment in Visma, including substantial co-investment participation in addition to its commitment to invest in all HgCapital 7 deals.

In July, the Mercury team completed an investment in Sequel Business Solutions, a leading software and service provider to the Lloyd's of London insurance market. The Trust has contributed a total of £4.4 million.

Further Investments

In June, Ullink announced the acquisition of NYFIX and Metabit from NYSE Technologies, which completed in September 2014. The acquisition was partly funded with debt and a further £2.3 million has been deployed on behalf of the Trust.

During the period, e-conomic, a SaaS accounting and SME solution provider based in Denmark, has announced the acquisition of Speedledger, a Swedish leader in web-based accounting for micro businesses; and a joint venture with CE Consulting Empresarial ('CE'), a leading Spanish provider of business advisory services. The Trust has contributed a total of £1.8 million.

In addition, the Trust has participated in further investments of £6.6 million, to give a total for all investments completed in the period of £55.1 million.

Realisations

Since 30 June 2014, the Trust has completed the sale of three buyout portfolio companies.

As described above, in August 2014, HgCapital completed the sale of Visma, a leading software and BPO services business in the Nordic region. The proceeds of this transaction have returned £34.3 million to the Trust, in addition to the £7.1 million dividend received in May, representing an uplift of £9.7 million (26 pence per share) over the carrying value of £31.7 million at 31 December 2013. The terms on which the realisation had been agreed were reflected in the NAV at 30 June 2014. Over the life of the investment prior to this transaction, the Trust had invested £16.3 million and received total proceeds of £84.0 million, representing an investment multiple of 5.2x and a gross IRR of 33% p.a. In order to participate in the continuing growth of Visma the Trust rolled over £40.0 million into a new investment.

The sale of Schleich, a toy manufacturer headquartered in Germany, to Ardian, the French Private Equity Firm, was announced in May 2014. The cash proceeds of this transaction on completion in July were £11.8 million for the Trust, representing an uplift of £4.2 million (11 pence per share) over the carrying value of £7.6 million at 31 December 2013. The proceeds from this sale represented an investment multiple of 2.6x cost and a gross IRR of 14% p.a.

In July, we announced the sale of Voyage Care to Partners Group and Duke Street Capital/Tikehau. Upon completion, in September 2014, the Trust received proceeds of £8.4 million. This disposal represented an increase of £0.9 million (2 pence per share) over the carrying value of £7.5 million at 30 June 2014.

In addition, the Trust received other proceeds of £0.6 million, resulting in total proceeds of £55.1 million during the period.

Current trading

The Manager is represented on the board of every material investment in the portfolio and its portfolio management team is actively involved in working with the management of each investee company to add value through identifying and implementing strategic and operational change, investing for faster growth and improving margins; the portfolio team also supports management in identifying potential acquisitions (such as those made recently by Ullink and e-conomic), conducting due diligence, negotiating terms and arranging funding.

The Manager receives monthly management accounts from all the buyouts in which the Trust is invested. These are discussed with the Board at every meeting, together with other information about the trading environment, strategy, prospects and leadership of each business, and the actions that the Manager is taking to effect improvements. The latest available trading figures for companies in the portfolio are for the twelve month period ended 31 August 2014.

The top 20 companies in the mid-cap buyout portfolio have seen average sales growth in the last twelve months to August of 10%, consistent with the rate of growth reported in the interim results. Of these investments, nine increased sales by greater than 10%, including six by more than 15%.

During the last twelve months to August, EBITDA of the top 20 mid-cap buyout investments grew, on average, by 10%, up slightly from the figure of 9% reported in the interim results. Of these investments, nine increased EBITDA by more than 10%, including four by more than 20%. Four investments have reported EBITDA materially below the prior year to 31 August.

Investment objective 

The Trust gives investors access to a private equity portfolio run by an experienced and well-resourced Manager that makes investments in private companies across Northern Europe in the TMT, Services and Industrials sectors. In addition, the Trust has a commitment to invest in small-cap TMT deals, where the Manager has many years of experience, alongside HgCapital's Mercury fund. Finally, the Trust also holds investments in the Manager's two renewable energy funds.

The objective of the Trust is to provide shareholders with long-term capital appreciation in excess of the FTSE All-Share Index by investing in unquoted companies. The Trust provides investors with exposure to a diversified portfolio of private equity investments primarily in the UK and Continental Europe.

Results at 30 September 2014

(1) Includes net revenue of 50.4p over the nine month period to 30 September 2014

(2) Includes a dividend of 29.0p in respect of the year ended 31 December 2013 and a special dividend of 19.0p, announced in the interim report, which was paid in September 2014.

Unaudited NAV per Share 

The buyout investment portfolio has not been revalued at 30 September 2014. The unaudited NAV at 30 September 2014 is based on the NAV at 30 June 2014, adjusted to reflect purchases and sales of investments, currency movements, market prices (at bid) in respect of listed investments and any dividends payable.

The Trust has a significant exposure to euro denominated assets. As at 30 September 2014, the depreciation of the euro against sterling, by 2.8% since 30 June 2014, has resulted in a decrease in the valuation of that portion of the portfolio of £3.5 million (9.5 pence per share). Other non-sterling denominated assets reflected a net appreciation against sterling, resulting in an increase of £0.3 million (0.7 pence per share) on the portfolio.

Balance Sheet

At 30 September 2014 the Trust's summary balance sheet was as follows:

As at 30 September 2014, the Trust had liquid resources of £67.2 million (15% of the 30 September 2014 NAV). This compares with outstanding commitments to invest in or alongside the Manager's Hg7, Hg6, Hg5, Mercury, RPP and RPP2 funds amounting to £215.4 million (49% of the 30 September 2014 NAV). The Trust also has a £40 million bank facility that is currently undrawn.

Portfolio

The portfolio of investments at 30 September 2014 (at valuation including accrued interest) consisted of the following, with the twenty largest primary mid-cap buy-out investments listed in detail: 

The sector analysis of the total assets is listed below:

This statement is a general description of the financial position and performance of the Trust for the period from 1 July 2014 to 7 October 2014. It does not contain any profit forecast or forward looking information. Future performance and share price are likely to be affected by a number of factors, including (but not limited to) general economic and market conditions and specific factors affecting the financial performance or prospects of individual investments within the Trust's portfolio.