Interim Management Statement
HgCapital Trust plc
Interim Management Statement
10 October 2012
HgCapital Trust plc (the `Trust'), today issues its Interim Management
Statement in accordance with FSA Disclosure and Transparency Rule 4.3. This
statement relates to the period from 1 July 2012 to 10 October 2012 and
incorporates the Trust's calculation of its Net Asset Value (NAV) at 30
September 2012, in the same form as is issued following the end of each month.
The NAV at 30 September 2012 is based on the valuations of unquoted investments
as at 30 June 2012, as set out in the interim report issued on 23 August 2012,
with any subsequent investment completed by the date of the announcement
accounted for at cost; in addition, adjustments are made for realisations,
exchange rates, changes in the value of quoted securities, dividends payable
and net revenues during the period.
Activity during the period
Investment Environment
The views of the Board and the Manager on the current investment environment
remain substantially unchanged.
* The macro-economic environment remains weak across Western Europe where the
Manager invests.
* We continue to see poor economic indicators and market sentiment across
most of the regions in which our Manager, HgCapital, invests.
* There appears to be more risk on the downside than opportunity on the
upside with respect to general economic indicators.
The Board and the Manager have held a cautious view of Western European
economic prospects since 2009, assuming minimal levels of GDP growth and
greater volatility, generally taking a more bearish stance than most economic
commentators over the last three years. The Manager believes, however, that
macro-economic factors have relatively little bearing on its investment
performance over the medium and long-term. This is because its investment
strategy is focused on using its deep sector expertise to identify market
niches that will exhibit strong secular growth despite a weak overall economy
and provide consistent opportunities to invest in multiple businesses that
benefit from these fundamental growth trends.
Put simply, the Manager uses its sector expertise, developed over 10-15 years,
to identify the highest quality, growth companies in market niches which
themselves are growing at typically 2-3 times GDP, driven by fundamental
long-term factors. The most obvious example is the increasing penetration of
internet-based transactions for businesses, a trend identified many years ago
by the Manager and exploited in several different sectors. Companies such as
Visma, acquired by the manager in 2006, Achilles and Epyx, acquired in 2008/9,
Lumesse in 2010 and GroupNBT, acquired in late 2011, all benefit from this
trend and as a result have produced consistent growth in revenue and profit in
excess of 10% per annum since 2008. The Manager also believes that such
companies are more attractive to both trade investors and other financial
acquirers when the time comes to realise its investment.
The Manager remains relatively cautious about new investment and will continue
to adopt a similar stance, although within its sectors of expertise it
continues to find pockets of opportunity to acquire market leading businesses
at reasonable prices, often where it has had the opportunity to build
relationships with such companies over many years before making an investment.
The Manager said in the Trust's interim report that it was seeing active
interest in acquiring a number of its portfolio companies, as a result of their
growth and market positions, from external trade or financial buyers, and that
it would continue to consider realising its investments as it has done
consistently over several years. In the last six months this has proved to be
particularly pertinent, as the Manager sold SHL (a 2006 investment in a
business delivering psychometric testing via the internet) for 3.1x cost and
26% p.a. IRR to a US-based strategic investor; Mercury Pharma (a 2009
investment in a specialist pharmaceutical business) for 4.1x cost (potentially
rising to 4.3x) and a 67% p.a. IRR to a larger private equity investor; and its
UK wind renewable energy infrastructure operating assets to a strategic
investor, for 2.0x cost and a 20% p.a. IRR. All of these investments delivered
returns significantly above their initial targets and ahead of similar vintage
investments by other managers. In total, HgCapital, the Manager, returned in
excess of £500 million to its clients, including £67.2 million to the Trust,
during the summer of 2012, a record for the firm in such a period.
The Manager believes that the two buy-out realisations, each of which were at a
significant premium (average 30%) to the carrying value before sale,
demonstrates the benefit of acquiring premium quality companies ("A" grade
assets) which are attractive to a range of suitors in any economic environment
because of their superior financial return characteristics, their defensibility
exemplified by growth through the last 3 years' recession, and their strategic
positions as champions in their respective markets.
New Investments
The Trust has participated in investments in the buy-out and Renewable Energy
funds, totalling £8.0 million in the period.
The first investment by the Hg Mercury Fund, Valueworks Limited, was announced
on 8 October 2012. This investment is expected to complete by the end of
October and the Trust's participation is estimated to be £2.5 million.
Realisations
In August, SHL, the global leader in talent management, was sold to a US trade
buyer, The Corporate Executive Board Company, for $660 million. The sale
represents an investment multiple of 3.1x original cost and a gross IRR of 26%
p.a. over the investment period. The Trust received proceeds of £26.5 million.
In August, Mercury Pharma was sold to Cinven, a private equity investor, for £
465 million. The initial proceeds from the sale realised £35.4 million in cash.
This represents a total return of 4.1x original cost (potentially rising to
4.3x) and a gross IRR of 67% p.a. over the investment period.
RPP1's UK Onshore Wind operating portfolio was sold to the asset management arm
of Munich Re, MEAG, at an investment multiple of 2.0x and a gross IRR of 20%
p.a. The proceeds from the sale returned £5.3 million to the Trust.
Current trading
The Manager is represented on the board of every material investment in the
portfolio and receives monthly management accounts from all the buyouts in
which the Trust is invested. These are regularly discussed with the Board,
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 period ended 31 August 2012.
The top 20 companies in the buyout portfolio have seen average sales growth in
the last twelve months, to August, of 12%, up from 11% as reported in the
interim results. Of these investments, 10 increased sales by greater than 10%,
including 2 by more than 20%.
During the last twelve months, to August, average growth in EBITDA of the top
20 buyout investments increased by 12%, the same increase as was reported in
the interim results. Of these investments, 8 increased EBITDA by more than 10%,
including 2 by more than 20%. Three investments have reported EBITDA materially
below the prior year.
Trading in the last three months has been strong, with only three companies in
the top 20 experiencing any decline in EBITDA over the previous equivalent
period.
The Trust has a significant exposure to euro denominated assets. As at 30
September 2012, the depreciation of the euro against sterling, by 1.6% since 30
June 2012, has resulted in a decrease in the valuation of that portion of the
portfolio. Conversely, the appreciation of Norwegian Kroner and Swedish Kroner
against sterling of 0.8% and 2.2% respectively, has resulted in an increase in
the sterling valuation of assets denominated in those currencies.
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 Healthcare, Industrials, Services and
TMT sectors. In addition, the Trust has made 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.
Performance
The Manager's aim is to achieve returns in excess of the FTSE All-Share Index
over the long term, but is not intended to reflect movements in the Index.
Between 30 June and 30 September, the diluted NAV return (diluted NAV plus
dividend) was 2.6%, compared with a 4.7% increase in the FTSE All-Share Index.
The Trust's share price at 30 September 2012 was 1,000.0 pence, a discount of
14.3% against the diluted NAV of 1,167.4 pence and a discount of 17.0% against
the basic NAV of 1,205.0 pence per share. The Trust's share price (on a total
return basis) increased by 11.0% over the three months to 30 September 2012, in
a period when the FTSE All-Share Index increased by 4.7%.
These calculations of NAV are based on valuations of the portfolio as at 30
June 2012, using market multiples at that date, and therefore do not reflect
changes in the ratings of comparable listed companies between 1 July 2012 and
30 September 2012. The book value of the unquoted portfolio will next be
reviewed, as usual, at 31 December 2012, 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 2012 and is unaudited.
One month Three One year Three Five Ten years
months years years
p.a. p.a. p.a.
NAV per Ordinary 0.5% 2.6% 5.7% 11.7% 8.9% 15.4%
share (diluted)
NAV per Ordinary 0.6% 2.9% 6.4% 12.8% 9.6% 15.7%
share (basic)
Ordinary Share 1.5% 11.0% 1.1% 7.4% 6.5% 18.3%
price
FTSE All-Share 1.1% 4.7% 17.2% 8.0% 1.7% 9.0%
Index
Sources: HgCapital, Factset
Results
At 30 September 2012
NAV per share*:
- Diluted (1) 1,167.4p
- Basic 1,205.0p
Share price - ordinary shares: 1,000.0p
Ordinary share price discount to (14.3%)
NAV (diluted):
Ordinary share price discount to (17.0%)
NAV (basic):
Share price - subscription 45.5p
shares:
Total net assets: £383.5m
Net yield: 1.0%
Gearing: Nil%
Ordinary shares in issue: 31,826,507
Subscription shares in issue: 5,498,191
* includes 9 months net revenue of 28.9p.
Ticker codes:
Ordinary shares HGT
Subscription shares HGTS
1. The diluted NAV per share calculation is based on the assumption that all
Subscription shares in issue are exercised at the price of 950 pence per
share, which is the exercise price applicable in October 2012; the exercise
price in May 2013 (the last date for exercise) will increase to £10.25.
Unaudited NAV per Share
The investment portfolio has not been revalued at 30 September 2012. The
unaudited NAV at 30 September 2012 is based on the NAV at 30 June
2012, adjusted to reflect purchases and sales of investments, currency
movements and market prices (at bid) in respect of listed investments.
Net revenue for the nine months to 30 September 2012 was 28.9p.
Balance Sheet
At 30 September 2012 the Trust's summary balance sheet was as follows:
£m %
Unquoted investments 259.5 67.7
Accrued income on 38.2 10.0
investments
Total investment 297.7 77.7
portfolio
Cash and other liquid 90.2 23.5
assets
Other net liabilities (4.4) (1.2)
NAV 383.5 100.0
Including the impact of the £2.5 million Mercury investment, that is expected
to close towards the end of October 2012, liquid resources (including a £40
million undrawn loan facility) are expected to be £127.7 million (33% of the 30
September 2012 NAV) and the Trust's undrawn commitments to invest in or
alongside the Manager's Hg6, Hg5, Mercury, RPP and RPP2 funds is expected to be
£169.0 million.
Portfolio
The portfolio of investments at 30 September 2012 (at valuation including
accrued interest) consisted of the following, with the twenty largest primary
buy-out investments listed in detail:
Investment % of Sector
Total
Assets
1 VISMA 7.4 TMT
2 IAS 6.7 TMT
3 TeamSystem 6.7 TMT
4 Lumesse 4.8 TMT
5 Achilles 4.6 TMT
6 ATC 4.1 Services
7 Group NBT 3.7 TMT
8 JLA 3.4 Services
9 Manx Telecom 3.2 TMT
10 Epyx 3.2 TMT
11 SimonsVoss 3.1 Industrials
12 Voyage 3.1 Healthcare
13 Qundis 2.9 Industrials
14 Frosunda 2.1 Healthcare
15 Schleich 1.7 Consumer & Leisure
16 Sporting Index 1.6 Consumer & Leisure
17 Teufel 1.4 Industrials
18 CSH 1.3 TMT
19 Mainio Vire 1.2 Healthcare
20 CES 1.0 Services
Total Top 20 67.2
Other primary buy-out 3.2
Secondary buy-out
HgCapital 6 E 2.6
Total buy-out investments 73.0
Renewable Energy
investments
Hg RPP 1 2.6
Hg RPP 2 2.1
Total investment portfolio 77.7
% of Total
Sector Assets
TMT 41.5
Services 9.3
Industrials 8.3
Healthcare 7.1
Renewable Energy 4.7
Consumer & Leisure 3.8
Other 1.7
Cash and other liquid assets 23.6
Total 100.0%
This statement is a general description of the financial position and
performance of the Trust for the period from 1 July 2012 to 9 October 2012. 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.
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