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Fund Profile

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Disclosure – Independent Investment Research

This is independent research issued by Kepler Partners LLP. The analyst who has prepared this research is not aware of Kepler Partners LLP having a relationship with the company covered in this research report and/or a conflict of interest which is likely to impair the objectivity of the research and this report should accordingly be viewed as independent.

Overview
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Overview

HgCapital Trust (LON:HGT) is one of relatively few directly-investing, i.e. not a fund of funds, private equity trusts in the UK market. As manager, Hg specialise in the European software and business services sectors. This part of the economy has seen a huge amount of innovation and growth over the last decade or more and HGT’s NAV has performed strongly in absolute and relative terms (see Performance section).

As discussed in the Portfolio section, directly-investing private equity trusts, typically, have relatively concentrated portfolios compared to typical quoted equity funds. HGT is no exception, with the top two investments representing 30% of the portfolio. This means that, more than other LPE trusts and equity funds, the fortunes of HGT over the short term depend on the operating performance of these two investments. This represents a degree of specific risk. Nevertheless, the sector focus and higher-growth companies that HGT invests in mean that it is differentiated relative to the listed private equity (LPE) sector, as well as UK indices. Hg claim that HGT’s portfolio companies, when aggregated, would be the second-largest software business in Europe. If listed, it would be a member of the FTSE 100.

Also, HGT is unique in that it is the only trust in the sector that, recently, has been able to issue shares at a premium to NAV. As discussed in the Discount section, worries on the impact from a global recession has meant that a premium has given way to a discount.

Analyst's View

HGT’s long-term track record is very impressive, as is its record over the short term. Over the past ten years to 31/08/2022, HGT has delivered a compound annual NAV return of c.17% p.a., significantly ahead of the FTSE All-Share Index return of 7% p.a., over the same period. As anyone who has invested in listed private equity in the past knows, these returns do not come without risk, either to valuations or discount. However, with a relative paucity of innovative, technology-orientated companies in UK indices, HGT offers UK investors a differentiated exposure.

Certainly, the market environment has changed from last year but Hg point out that those companies which have seen their valuations fall the furthest are those which have been the least profitable. Profitable companies, like theirs, have held up much better. As a result, the NAV year to date is flat, outperforming listed markets, which Hg attribute to underlying earnings’ performance and some realisations offsetting a decline in valuations.

We would expect that whilst the underlying companies are, undoubtedly, growing faster than the wider economy, earnings and valuations are unlikely to be insulated from a protracted downturn. To an extent, HGT’s discount widening to 20% shows that the market is not ignoring this fact. However, whether HGT’s NAV outperformance compared to public markets will remain as wide over the next six months as it is currently will, in our view, depend very much on the earnings’ trajectory of the underlying companies. If earnings prove to be resilient then, as discussed in the Discount section, there is clear potential for the current discount to narrow.

Bull

  • Narrow sector focus gives managers significant edge to add value
  • High-growth companies provide differentiated exposure to UK and European indices
  • Shares trading on a material discount to NAV

Bear

  • Portfolio is illiquid, meaning shares could remain on a wide discount to NAV for a considerable time
  • Highly-concentrated portfolio means fortunes of trust are, arguably, hostage to a relatively narrow group of businesses
  • HGT has, as have all private equity trusts, relatively high charges (especially KID RIY figures)
Continue to Portfolio

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