Interim Management Statement

RNS Number : 9814G

HgCapital Trust PLC

13 May 2014

 



HgCapital Trust plc

Interim Management Statement

13 May 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 January 2014 to 12 May 2014 and incorporates the Trust's calculation of its Net Asset Value (NAV) at 30 April 2014, in the same form as is issued following the end of each month. The NAV at 30 April 2014 is based on the valuations of unquoted investments as at 31 December 2013, as set out in the annual report issued on 10 March 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 April 2014.  The renewable energy portfolio has been revalued where relevant as a result of the further changes to the general legislation announced by the Spanish government as highlighted below.

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 31 December and 30 April 2014, the NAV total return (NAV plus dividend) was -1.7%. The Trust's share price at 30 April 2014 was 1,036.0 pence, a discount of 8.4% against the NAV per share of 1,131.6 pence. The Trust's share price (on a total return basis) increased by 5.4% over the four months to 30 April 2014, in a period when the FTSE All-Share Index increased by 1.5%.

The pro-forma NAV per share is 1,155.8 pence, after adjusting for the impact of the Visma realisation and re-investment announced in April 2014 and expected to complete in July, as described in more detail below.

These calculations of NAV are based on valuations of the portfolio as at 31 December 2013, using market multiples at that date, and therefore do not reflect changes in the ratings of comparable listed companies between 1 January 2014 and 30 April 2014. The book value of the unquoted portfolio will next be reviewed, as usual, at 30 June 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. Spanish assets within the renewable energy portfolio have been revalued as a result of the further changes to the general legislation announced by the Spanish government, as described below.

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

	One month	YTD	One year	Three years p.a.	Five years p.a.	Ten years p.a.
NAV per Ordinary share	(1.7%)	(1.7%)	(6.7%)	1.9%	7.0%	13.6%
Ordinary Share price	0.8%	5.4%	(7.4%)	(1.0%)	7.6%	14.1%
FTSE All-Share Index	2.2%	1.5%	10.5%	8.5%	14.7%	8.6%

Sources: HgCapital, Factset

Activity during the period

Investment Environment

The views of the Board and the Manager on the current investment environment remain largely unchanged from the 2013 year end.

·      The improvement in the macro-economic environment has continued to gather momentum in Western Europe where the Manager invests. 

·      There has been greater confidence across all business sectors, with the recovery in the UK continuing to gain pace. 

·      This recovery remains at a relatively tentative stage following a long period of recession and the Manager, HgCapital, remains suitably prudent and disciplined in their investment approach.

Over the course of the last year, the Trust has both deployed capital and realised investments. The Manager remains relatively cautious on new investments but believes that within its sectors of expertise it can continue to find pockets of opportunity to acquire 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 the last twelve months were generated on a proprietary basis from many years of sector research. Consistent with this, the Manager has avoided full auction processes wherever possible. This sector expertise, developed over 10-15 years, is used to identify the highest quality growth companies in sub-sectors which themselves are growing at typically 2-3 times GDP, driven by fundamental long-term factors. An example the Manager has often cited is the increasing penetration of internet-based transactions for businesses, a trend it identified many years ago and has exploited in several different sectors.

Trade and financial buyers continue to express interest in acquiring a number of the Manager's portfolio companies, as a result of their growth and market positions, and realising them by way of an IPO in public markets is also an option.  The Manager believes there will be further opportunities in the short and medium term to consider realising investments profitably, as it has done consistently over several years.

New Investments

Between 1 January 2014 and the date of this announcement, the Trust has completed three new buyout investments alongside other clients of the Manager, deploying a total of £19.6 million.

In February 2014, the Services team completed the acquisition of Zenith at an enterprise value of £231 million. Zenith is one of the UK's largest independent leasing, fleet management and vehicle outsourcing businesses. At the beginning of March 2014, Zenith and Leasedrive (acquired in December 2013) began operating as a single entity. The Trust deployed a total of £9.7 million net of a rebate received in respect of a refinancing of the combined business. The Trust's share of the combined business is £24.0 million.

In February, the Mercury Fund announced an investment in Relay Software, a provider of software to insurance brokers, underwriters and insurers in the Republic of Ireland. The Trust contributed a total of £2.2 million to this investment.

In early March 2014, HgCapital announced an investment in Ullink, a leading global provider of electronic trading applications and connectivity to the financial community. The Trust's share of this investment was £7.7 million.

In addition, the Trust has participated in further investments in the buy-out and Renewable Energy funds, to give a total for all investments completed in the period of £25.0 million.

Re-investment

In April 2014, HgCapital announced a re-investment in Visma Group Holdings ("Visma"), a leading software and BPO services business in the Nordic region, based in Oslo, Norway, following its partial sale by KKR. HgCapital will be a co-lead investor in the new transaction structure, as Manager of its HgCapital 7 Fund and the Trust, alongside KKR and Cinven, who will each hold 31%, with management holding the balance. Cinven are committing capital to the business for the first time.  Completion of this transaction is subject to regulatory approval and is expected to complete in July. 

This realisation is expected to result in an investment multiple on all capital invested on behalf of the Trust in Visma between 2006 and 2014 of approximately 5.1x original cost and a gross IRR of 33% p.a. over the investment period. The estimated proceeds of this transaction should return £40.7 million to the Trust, representing an uplift of £9.1 million (24.2 pence per share) over the carrying value of £31.6 million in the Net Asset Value ("NAV") at 30 April 2014. Over the life of the investment to date, the Trust is expected to receive a total return of £83.1 million, including the proceeds to be received in July, on a total investment of £16.3 million.

The Trust's share of the re-investment in Visma will be up to £40.0 million which includes a significant co-investment participation, alongside other clients of HgCapital, in addition to the Trust's core investment of approximately £20 million under its £200 million commitment to Hg7.

Realisations

Since 31 December 2013, the Trust has completed the sale of two buyout portfolio companies (excluding the realisation of Visma noted above).

In February 2014, we announced the completion of the IPO of Manx Telecom on London's Alternative Investment Market ('AIM') at a market capitalisation of £160 million. The proceeds from the realisation of HgCapital's holding and earlier proceeds from refinancing the business represented an investment multiple of 2.1x original cost and a gross IRR of 26% p.a. over the investment period. The Trust received proceeds on completion of £13.1 million, an uplift of £3.0 million over the carrying value of £10.1 million at 31 December 2013.

Americana, a UK-based apparel company, was sold in February 2014 to EMERAM Capital Partners, a Munich-based private equity fund. Americana was written down to zero in June 2013 and the initial proceeds of this sale will return £0.6 million to the Trust, expected in June, with a further £0.5 million retained in the business which is expected to be received by the Trust in 2017.

In addition, the Trust received total proceeds of £2.6 million from other buy-out and Renewable Energy investments, resulting in total proceeds of £15.7 million during the period.

Unrealised Buyout Portfolio Activity

In addition to new investments and exits, there has been significant activity in the unrealised portfolio in the first four months of 2014.

As mentioned above, Zenith (acquired February 2014) and Leasedrive (acquired December 2013) began operating as a single entity. Zenith and Leasedrive are both vehicle leasing and fleet management companies. Leasedrive brings extra capability in short-term hire and white-label fleet management to Zenith, while Zenith's technology platform will enhance Leasedrive's service levels. John Walden (formerly CEO of Lex) has joined as Chairman.

In April, Nair & Co, a global provider of international expansion services for corporate clients entering global markets, announced the merger with High Street Partners (HSP), to create a global accounting and administration business. At the same time, the company completed a refinancing of their debt, raising $38 million.  Following this transaction, the new business will employ more than 700 staff, with over 500 clients across more than 80 countries. The combined entity will be known as 'Radius' going forward.  The Trust is expected to receive £3.4 million from the refinancing proceeds in May, of which £2.2 million will be reinvested to fund the HSP acquisition. 

TeamSystem, one of the main providers of information management software in Italy to SMEs and professionals, announced in April a €130m tap issue of its €300m Senior Secured Notes due 2020, to fund the acquisition of Il Sole24Ore's Software business. This transaction valued the acquisition at an Enterprise Value of €117m.

In April, IRIS, the UK accountancy and payroll software provider, announced the acquisition of Cascade Human Resources, a leading provider of HR and payroll solutions. The transaction was funded by IRIS from its own resources. With a joint customer base of over 70,000 UK businesses the combined business now has a broader product set which includes HR solutions alongside the IRIS payroll and KashFlow bookkeeping applications.

Renewable Energy Portfolio

As highlighted in the Annual Report and Accounts in March 2014, Spain announced new general legislation in July 2013 making further changes which were expected to have a material negative impact on the value of the Spanish assets. In February 2014, Spain published a draft of the detailed new tariffs under the July 2013 legislation which is expected to be passed into law in the next 3 months. At 1,700 detailed pages, the regulations cover hundreds of different tariffs based on technology, location and date of operation. HgCapital has now evaluated the impact of the draft legislation on the seven solar projects held by RPP1 and 34 hydro projects held by RPP2 and this has been reflected in the 30 April 2014 valuation. The impact of this revaluation has been a further write-down of these assets, reducing the Trust's April NAV by £4.6m or 12 pence per share compared with the equivalent valuation at 31 March 2014. This valuation is based on the available information and is based on assumptions such as a final enactment of the published draft and a successful debt restructuring negotiation with the lenders to the solar and hydro projects. The residual value of the Trust's renewable assets in Spain now represents approximately 5 pence per share; while further deterioration cannot be ruled out, the residual value takes no account of claims for compensation that the Manager and other international investors are pursuing under the Energy Charter Treaty.

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 March 2014.

The top 20 companies in the buyout portfolio have seen average sales growth in the last twelve months to March of 9%, consistent with the rate of growth reported in the annual results.  Of these investments, eight increased sales by greater than 10%, including three by more than 15%. 

During the last twelve months to March, EBITDA of the top 20 buyout investments grew by 10% on average, up slightly from the figure of 9% reported in the annual results.  Of these investments, ten increased EBITDA by more than 10%, including five by more than 15% (eight investments and five investments respectively in the twelve months to December).  Three investments have reported EBITDA materially below the prior year. 

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, Industrials and Healthcare sectors.  In addition, the Trust has made a £60 million 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 April 2014     

	30 April 2014	Pro-forma
NAV per share: (1), (2)	1,131.6p	1,155.8p
Share price - ordinary shares:	1,036.0p
Ordinary share price discount to NAV	8.4%
Total net assets: (1)	£422.4m	£431.4m
Net yield:	2.8%
Gearing:	Nil%
Ordinary shares in issue:	37,324,698
Ticker codes:
Ordinary Shares	HGT

⁽¹⁾      Post a dividend provision of 29.0 pence per share announced on 10 March 2014, with an ex-dividend date of 2 April 2014 and payable on 16 May 2014. Pro-forma NAV per share and net assets includes uplift of 24.2 pence per share and £9.1 million respectively in relation to Visma realisation and re-investment announced in April 2014, as described above.

⁽²⁾      Includes net revenue of 0.01p over the four month period

Unaudited NAV per Share 

The buyout investment portfolio has not been revalued at 30 April 2014. The unaudited NAV at 30 April 2014 is based on the NAV at 31 December 2013, adjusted to reflect purchases and sales of investments, currency movements, market prices (at bid) in respect of listed investments and any dividends payable. The renewable energy portfolio has been revalued where relevant as described above.

The Trust has a significant exposure to euro denominated assets.  As at 30 April 2014, the depreciation of the euro against sterling, by 1.3% since 31 December 2013, has resulted in a decrease in the valuation of that portion of the portfolio of £1.5 million (4.1 pence per share). Similarly, other non-sterling denominated assets depreciated against sterling, resulting in a decrease of £0.9 million (2.5 pence per share) on the portfolio.

Balance Sheet

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

	£m	%
Total investment portfolio	350.2	82.9
Cash and other liquid assets	81.6	19.3
Other net liabilities1	(9.4)	(2.2)
Net assets	422.4	100.0

¹ includes provision of £10.8 million for dividend payable in May 2014 (subject to shareholder approval at the AGM on 13 May).

After adjusting for the impact of the dividend payable in May 2014, liquid resources are expected to be £70.8 million (17% of the 30 April 2014 NAV) and the Trust's undrawn commitments, to invest in or alongside the Manager's Hg7, Hg6, Hg5, Mercury, RPP and RPP2 funds, after adjusting for the impact of the re-investment in Visma announced in April 2014, are expected to be £233 million.

Portfolio

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

	Investment	% of Net Assets		Sector
1	IRIS	7.8		TMT
2	Visma	7.5		TMT
3	TeamSystem	5.8		TMT
4	Zenith Leasedrive	5.7		Services
5	P&I	5.2		TMT
6	JLA	4.7		Services
7	Achilles	4.7		TMT
8	Nair & Co	4.5		Services
9	QUNDIS	3.0		Industrials
10	Lumesse	2.9		TMT
11	e-conomic	2.7		TMT
12	SimonsVoss	2.7		Industrials
13	NetNames	2.5		TMT
14	Voyage	2.4		Healthcare
15	Frosunda	2.4		Healthcare
16	Atlas	2.0		Services
17	Ullink	1.8		TMT
18	Schleich	1.8		Consumer & Leisure
19	Sporting Index	1.7		Consumer & Leisure
20	Investments in UK Parts Alliance	1.1		Services
	Total Top 20	72.9
	Other primary mid-cap buy-out	2.4
	Primary small-cap buy-out
	HgCapital Mercury D	2.1
	Secondary mid-cap buy-out
	HgCapital 6 E	2.5
	Total buy-out investments	79.9
	Renewable Energy investments
	Hg RPP 1	0.8
	Hg RPP 2	2.2
	Total investment portfolio	82.9

The sector analysis of the total assets is listed below:

Sector	% of Net Assets
TMT	43.0
Services	18.1
Industrials	6.5
Healthcare	6.3
Consumer & Leisure	3.5
Renewable Energy	3.0
Fund Investments and Other	2.5
Cash and other liquid assets	17.1
Total	100.0%

This statement is a general description of the financial position and performance of the Trust for the period from 1 January 2014 to 12 May 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.

 

END

 

 

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