HgCapital 02 June 2020

HgCapital Trust (HGT) is a private-equity trust offering direct exposure to companies in the software and services sectors, typically in northern Europe.

Compared to typical equity funds, the trust is highly concentrated: the top 20 companies add up to 88.4% of NAV, with the largest investment at 20.7%. The managers provide active, hands-on management to the companies HGT holds as they undergo rapid development or transformation.

The sector focus and higher-growth companies that HGT invests in mean that it is differentiated relative to most of the listed private equity (LPE) sector. The trust is also unique in that it is the only one in the sector that has been recently able to issue shares at a premium to NAV.

HGT’s long-term track record is very impressive, as is its record over the short term. Over the past five years HGT has delivered a compound annual NAV return of c. 17% p.a. (to 31/03/2020), significantly ahead of the FTSE All-Share return over the same period of 0.6% p.a. As anyone who has invested in listed private equity in the past knows, these returns do not come without risk (to valuations or discount).

HGT has a narrow sector focus, which at the current time looks very much the right place to be. At the same time, this narrow focus also presents risks. In view of the historical returns, this risk has clearly been worth taking and HGT has been one of the best performers of all investment trusts over the very long term.

However, we also think it worth noting that given HGT is trading close to NAV, the discount differential relative to peers in the LPE sector is meaningful. Should circumstances change significantly, this poses risks for shareholders should the discount widen out closer to the peer-group average.

At the same time, there are considerable attractions to Hg’s approach to investing. The resolute focus on software and business services in Europe has proved fertile ground for investing, and the network effects of having such a focus give HGT and its investee companies a distinct edge in their field.

The relative paucity of publicly listed technology companies in UK and European indices is unlikely to change soon. Their absence is illustrated by the stark underperformance of the UK and European indices year to date relative to US indices, which typically have significantly higher weightings in technology. If aggregated together, HGT’s portfolio companies would be the third-largest software business in Europe and – if listed – a member of the FTSE 100. HGT provides a unique exposure to high-growth niches which are found in few places in publicly listed businesses.