TIDMHGT
RNS Number : 3511F
HgCapital Trust PLC
09 March 2020
H gCapital Trust plc
ANNUAL Results for the YEAR ended 31 DECEMBER 2019
London, 9 March 2020: HgCapital Trust plc ("HGT"), which
provides investors with a listed vehicle that invests primarily in
unquoted software and service businesses, across Europe, managed by
Hg, today announces its annual results for the year ended 31
December 2019.
The objective of HGT is to provide shareholders with consistent
long -- term returns in excess of the FTSE All -- Share Index by
investing predominantly in unquoted companies where value can be
created through strategic and operational change.
CONTINUED Strong NAV performance PRIMARILY driven by ROBUST
double-digit revenue and EARNINGS growth
SUMMARY performance
29 February 31 December 31 December % Total
2020 2019 2018 return(1)
================ ============== ============== ============== ============
Share price GBP2.39 GBP2.58 GBP1.79 +47.5%
NAV per share GBP2.55 GBP2.55 GBP2.16 +20.8%
FTSE All-Share
Index +19.2%
================================================================ ============
2019
Movement
Net Asset Value GBP1.04bn GBP1.04bn GBP805m +GBP235m
================ ============== ============== ============== ============
(1) Total return assumes reinvestment of all historic
dividends
Note: All figures have been adjusted for the 10:1 share-split in
May 2019
Source: Hg, Factset
KEY HIGHLIGHTS 2019
! Net assets of more than GBP1 billion, with continued
outperformance of the FTSE All-share over one, three, five, ten and
twenty-year periods
- Share price total return of 47.5% to 31 December 2019.
- NAV per share of GBP2.55, a total return of 20.8%.
- Proposed final dividend of 3 pence per share (full year dividend of 4.8 pence per share).
- An investment of GBP1,000 twenty years ago would now be worth
GBP15,516, a total return of 1,452%. An equivalent investment in
the FTSE All-Share Index would be worth GBP2,569
! Strong growth from the realised and unrealised portfolio
- Revenue and EBITDA growth of 24% and 35% respectively across
the top 20 investments (92% of the portfolio) over the last twelve
months.
- GBP117 million of cash returned to HGT through realisations at
uplifts to book value and refinancings.
- Valuation multiple (EV/EBITDA) of 19.8x and net debt to EBITDA
ratio of 6.2x for the top 20 investments.
! Continued investment and commitments to drive future value
- GBP117 million invested on behalf of HGT into companies that
the Manager has known for many years.
- New commitment to Hg Saturn 2 of $400 million announced, which
will be deployed over the next four to five years.
! Increased focus on liquidity, more regular and transparent
reporting
- First placing of new shares for nine years, at a premium to
NAV, raising GBP75 million (after all expenses) of equity over
2019. This will be used to fund future commitments to Hg funds and
further co-investment in Hg portfolio companies.
- Introduction of quarterly valuations to improve market transparency.
- Ten for one share-split in May 2019 to help increase share liquidity.
! Roger Mountford will step down as Chairman and will be
succeeded by Jim Strang
- Jim Strang will be appointed as Chairman with effect from the
end of the AGM, after he is re-elected as a Director.
- The process of selecting a Chairman was led by Anne West, Senior Independent Director.
- A recruitment process to fill the vacancy created by the Chairman's retirement is under way.
POST PERIOD EVENTS AS AT 29 FEBRUARY 2020
! NAV per share of GBP2.55.
! Share price of GBP2.39, year-to-date performance of -7.2%.
! Pro-forma liquid resources post-completion of all announced
transactions and the proposed dividend payable in May 2020, are
GBP82 million (8% of 29 February NAV).
! Pro-forma outstanding commitments of GBP536 million (52% of 29
February NAV). We expect these to be drawn down over the next four
to five years.
THE MANAGER'S Outlook
-- A very strong year of performance for HGT with the portfolio
seeing consistent double-digit growth.
-- Hg continues to invest in "sweet-spot" businesses in eight
end-markets, or "clusters", where it has many years' knowledge.
-- A focus on operational improvement continues to drive
performance and deliver significant network benefits.
-- Further liquidity events expected over the next twelve months
through both exits and refinancings.
-- Robust double-digit trading performance underpins confidence
in the ongoing growth of a strong portfolio.
Strong earnings, realisations at uplifts to book value and
supporting the management teams of the underlying portfolio
businesses will continue to drive value for shareholders in
HGT.
s
Roger Mountford, Chairman of HGT, commented:
"2019 not only saw excellent results but was a transformational
year for HGT. I remain confident that, thanks to the skill and
resources of Hg, the outstanding performance HGT has delivered will
continue under Jim Strang."
- Ends -
The Company's 2019 Annual Report and a video from the Manager to
accompany the results are available to view at:
http://www.hgcapitaltrust.com/ .
For further details:
HgCapital Trust plc
Laura Dixon (Senior Investor Relations
Manager, Hg) +44 (0)20 7089 7888
Brunswick
Samantha Chiene and Alice Gibb +44 (0)20 7404 5959
About HgCapital Trust plc
HgCapital Trust plc is an investment company whose shares are
listed on the London Stock Exchange (HGT.L). HGT gives investors
exposure, through a liquid vehicle, to a portfolio of high-growth
unquoted companies, managed by Hg, an experienced and
well-resourced private equity firm with a long-term track record of
delivering superior risk-adjusted returns for its investors.
For further details, see www.hgcapitaltrust.com and www.hgcapital.com
HgCapital Trust plc
Annual report and accounts - 31 December 2019
The objective of HgCapital Trust ('HGT') is to provide
shareholders with consistent long -- term returns in excess of the
FTSE All -- Share Index by investing predominantly in unquoted
companies where value can be created through strategic and
operational change.
HGT provides investors with exposure to a fast -- growing
network of unquoted investments, primarily in software and service
businesses across Europe.
References in this Annual Report and Accounts to HgCapital Trust
plc have been abbreviated to 'HgCapital Trust' or 'HGT'.
Hg refers to the trading name of Hg Pooled Management Limited
and HgCapital LLP.
Hg Pooled Management Limited is the 'Manager'.
References in this Annual Report and Accounts to 'Total Return'
refer to a return where it is assumed that an investor has re --
invested all historic dividends at the time when they were
paid.
References in this Annual Report and Accounts to pounds sterling
have been abbreviated to 'sterling'.
Financial highlights
Annualised share price total return over the last 20 years:
+14.7%
2019 performance:
______________________________________________________________________________________________________
Share price
at 31 December 2019 was 257.5p a total return for the year
of:
+47.5%
(2018: +3.5%)
______________________________________________________________________________________________________
Market capitalisation
The market capitalisation of HGT at 31 December 2019 was:
GBP1.05bn
(2018: GBP666m)
______________________________________________________________________________________________________
NAV per share
at 31 December 2019 was 255.1p a total return for the year
of:
+20.8%
(2018: +14.3%)
Please refer to Note 10(b) in the full Annual Report and
Accounts for further detail on calculation of NAV per share
______________________________________________________________________________________________________
Net assets
The total NAV of HGT at 31 December 2019 was:
GBP1.04bn
(2018: GBP805m)
______________________________________________________________________________________________________
Full-year dividend
4.8p
(2018: 4.6p)
______________________________________________________________________________________________________
Total ongoing charges
The total ongoing charges for the year to 31 December 2019:
1.6%
(2018: 1.9%)
Please refer to page 110 in the full Annual Report and Accounts
for further detail on the calculation of ongoing charges.
______________________________________________________________________________________________________
Top 20 investments as at 31 December 2019:
_____________________________________________________________________________________________________
LTM sales growth
+24%
(31 Dec 2018: +25%)
_____________________________________________________________________________________________________
LTM profit growth
+35%
(31 Dec 2018: +27%)
_____________________________________________________________________________________________________
EV to EBITDA multiple
19.8X
(31 Dec 2018: 17.3x)
_____________________________________________________________________________________________________
Net Debt to EBITDA ratio
6.2X
(31 Dec 2018: 5.6x)
_____________________________________________________________________________________________________
These figures are calculated on a value -- weighted basis. For
further information on the top 20 portfolio trading performance and
valuation and net debt analysis, please refer to Hg's review below
(and on pages 42 to 43 of the full Annual Report and Accounts).
Balance sheet analysis as at 31 December 2019:
_____________________________________________________________________________________________________
Liquid resources
(18% of NAV)
GBP189m
In addition, HGT has an undrawn bank facility of GBP80
million.
_____________________________________________________________________________________________________
Outstanding commitments
(32% of NAV)
GBP336m
These commitments will be drawn down over the next 12 months and
are likely to be partly financed by cash from future realisations.
Future commitments are likely to be drawn over a period of four to
five years (2020 - 2025).
HGT can opt out of a new investment without penalty, should it
not have the cash available to invest.
_____________________________________________________________________________________________________
An active pipeline of investment opportunities led to new and
follow-on investments, whilst returning cash to HGT through both
realisations and refinancings.
Investment and realisation activity in 2019:
_____________________________________________________________________________________________________
Realisations for the benefit of HGT
GBP117m
_____________________________________________________________________________________________________
Cash invested on behalf of HGT
GBP117m
_____________________________________________________________________________________________________
For further information on investment and realisation activity
over the year, please refer to sections below and pages 46 to 50 in
the full Annual Report and Accounts.
Historical total return performance
Both HGT's share price and net asset value per share have
continued to outperform the FTSE All -- Share Index.
One Three Five Ten Twenty
year years years years years
% % p.a. % p.a. % p.a. % p.a.
------------------------------------- ------ -------- -------- -------- --------
Share price 47.5 22.2 23.1 15.0 14.7
------ -------- -------- -------- --------
NAV per share* 20.8 18.8 18.0 13.4 13.1
------ -------- -------- -------- --------
FTSE All -- Share Index 19.2 6.9 7.5 8.1 4.8
------------------------------------- ------ -------- -------- -------- --------
Share price performance relative to
the FTSE All -- Share Index +28.3 +15.3 +15.6 +6.9 +9.9
------------------------------------- ------ -------- -------- -------- --------
NAV per share performance relative
to the FTSE All -- Share Index +1.6 +11.9 +10.5 +5.3 +8.3
------------------------------------- ------ -------- -------- -------- --------
* Please refer to Note 10(b) on page 90 of the full Annual
Report and Accounts for further detail on the calculation of NAV
per share.
Based on HGT's share price at 31 December 2019 and allowing for
all historic dividends being reinvested, an investment of GBP1,000
made twenty years ago would now be worth GBP15,516, a total return
of 1,452%. An equivalent investment in the FTSE All-Share Index
would be worth GBP2,569.
Ten year dividend record
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
-------------------------- ---- ---- ---- ---- ---- ----- ----- ----- ----- -----
Final dividend (pence) 2.8 1.0 2.3 2.9 3.2 4.0 4.6 3.0 3.0 3.0
-------------------------- ---- ---- ---- ---- ---- ----- ----- ----- ----- -----
Special dividend (pence) - - - - 1.9 - - - - -
-------------------------- ---- ---- ---- ---- ---- ----- ----- ----- ----- -----
Interim dividend (pence) - - - - - - - 1.6 1.6 1.8
-------------------------- ---- ---- ---- ---- ---- ----- ----- ----- ----- -----
Total dividend (pence) 2.8 1.0 2.3 2.9 5.1 4.0 4.6 4.6 4.6 4.8
-------------------------- ---- ---- ---- ---- ---- ----- ----- ----- ----- -----
Chairman's statement
"2019 not only saw excellent results but was a transformational
year for HGT"
Roger Mountford, Chairman, HgCapital Trust plc
Dear Shareholder
I am very pleased to report that 2019 not only saw excellent
results but was a transformational year for HGT. Highlights
included:
-- Having been admitted to the FTSE 250 in October 2018, HGT
consolidated its position in the Index, with market capitalisation
increasing from GBP666 million at December 2018 to over GBP1
billion in December 2019.
-- Introduction of quarterly valuations as a further step in
giving the market transparency to support active trading in our
shares.
-- A 10-for-1 share split, reflecting the enormous growth in net
asset value per share over the last decade, resulting in a more
liquid market in our shares.
-- Our first placing of new shares for nine years, at a premium
to NAV, with a number of new institutional shareholders joining
HGT's register.
-- A series of tap issues of new shares providing more
opportunities for investors to add to their holdings, increasing
the amount raised from new equity to GBP75m.
Performance
HGT's net asset value increased to 255.1 pence per share at year
end (2018: 215.7 pence, adjusted for the share split), an increase
on a total return basis of 20.8% over the year.
More than 75% of the increase in value of unrealised investments
arose from increases in profits rather than valuation multiples.
This impressive result would have been even stronger but for
volatility in the value of sterling which led to a 4% reduction in
net asset value.
Following the increase in interim dividend from 1.6 pence to 1.8
pence per share, the Board is recommending a final dividend of 3.0
pence, making a total of 4.8 pence per share. We are also revising
our guidance and we anticipate total dividends in future years to
be not less than 4.8 pence per share.
Our share price recovered quickly from the market's nervous
period in late 2018, reaching a price of 257.5 pence at year-end
(2018: 178.5 pence, adjusted for the share split).
This represented a total return to shareholders in the year of
47.5%, out-performing the FTSE All-Share Index by 28.3%. More
importantly, we sustained our long-term record of out-performance
of the wider market, at more than 15% p.a. over the last three and
five years. Over the last twenty years our share price total return
has been 14.7% p.a., out -- performing the All-Share Index by close
to 10% p.a.
This long--term record was recognised by the Association of
Investment Companies, which marked the twentieth anniversary of
ISAs by identifying the investment trusts that delivered the
highest returns to investors who subscribed to an ISA over that
period. HGT delivered a return that put it well into the top ten UK
listed investments. We anticipate that an up to date calculation
will be published soon, reconfirming HGT's record as one of the
most rewarding long-term investment opportunities for regular
savers.
I am pleased also to report that HGT was awarded Investment
Company of the Year by Investment Week in the private equity and
growth capital sector. This is the ninth time that HGT has been
selected for this award. It reflects, I believe, not only another
outstanding year's return but also the consistency of returns we
have delivered and the quality and transparency of our reporting to
investors. The citation described HGT as "the Gold Standard of
private equity Investment Trusts".
Realisations
Following a period of 2 years in which Hg sold a total of 19
investments, this was a relatively quiet year for realisations; two
businesses were sold: Foundry and Register, achieving multiples of
cost of 2.1x and 4.2x respectively. Cash proceeds were also
received from the refinancing of several businesses we continue to
hold. We also realised our interest in one of two legacy renewables
funds. In total, we received proceeds of GBP117 million.
Investments
This annual report goes further than before in describing the
investment strategy of our manager, Hg. Their approach is to invest
primarily in two market sectors-software and services-and in eight
"clusters" based on the end-market users of the software or
services. This degree of focus enables Hg to identify large numbers
of opportunities, track them often for years, make highly informed
investments, and have a repeatable and iterative strategy for value
enhancement based on prior experience with comparable
businesses.
Hg's emphasis is on teamwork among its 120 investment and
portfolio management professionals. Investments are not the
personal choice of individual fund managers. Every investment must
be supported by Hg's investment committee and their large deal
teams are composed of experienced investors from across the firm
and its London, Munich and New York offices. Moreover, Hg has built
a 30-strong Portfolio Team comprising experienced senior managers
from industry and specialised business analysts; their role is to
support the development of transformational strategies for each
business we acquire and to give hands-on assistance to the business
in implementing strategic and operational change. This work not
only enhances revenue growth and profitability but also, in
recognition of the enhanced sustainability of the business, leads
to higher multiples being achieved when we sell. In certain cases
where a business continues to have opportunities to grow strongly,
whether organically or by acquisition, or improve margins, we are
happy to remain invested over a longer period than often observed
in the private equity market; for example, we have been invested in
IRIS since 2004 and Visma since 2006.
Having successfully adopted cloud-based software across much of
the portfolio, Hg is now an early mover in applying other new
technologies that the digital revolution is bringing forward.
Notable among these are Artificial Intelligence and Machine
Learning; a description of th is investment opportunity and case
studies, are set out below (or on pages 36 to 38 in the full Annual
Report and Accounts).
Hg's scale enables collaboration across the portfolio, ensuring
that best practice and past experience are shared among the manager
s of the 30-odd businesses in which we are invested. Sections below
(or pages 28 and 29 in the full Annual Report and Accounts)
describe how Hg has created an online community for its management
teams and regularly brings them together to encourage informal
co-operation and mutual support.
During the year, we invested GBP117 million in three new
investments, Transporeon, Litera, team.blue and a follow-on in
Lyniate (formerly known as Rhapsody)-one in each of four clusters
in which Hg has been investing for between five and fifteen years.
In addition, we made a further investment in Visma, a core holding
within another cluster where Hg has acquired enormous depth of
expertise over a long period.
New commitments
Shareholders will be familiar with the
commitment-investment-realisation cycle that underpins our
business. Every four years or so HGT and Hg's other institutional
clients make commitments to invest in a "vintage" of new
opportunities over the following four to five years. HGT thereby
enables private investors, wealth managers and smaller institutions
to invest alongside the world's largest institutional investors in
businesses that would otherwise be inaccessible to our
investors-and to do so on identical terms but with the added
advantages of a listed investment vehicle and the corporate
governance framework and transparency of an investment trust.
We are now in discussion with Hg about making new commitments to
invest in parallel with their new Hg Saturn 2, Hg Genesis 9 and Hg
Mercury 3 funds. Our first new commitment is to invest $400 million
in Hg Saturn 2, a fund designated in US dollars and designed to
make large acquisitions. We expect Hg Saturn 2 will make around
8-10 investments in total, with HGT investing around $40-50 million
in each holding. Further commitments to invest in Hg Genesis 9 and
Hg Mercury 3, consistent with our long-term strategy, will be
agreed in the coming weeks. In all cases, we will continue to have
the benefit of an "opt-out" from our commitment to invest in any
new investment if we do not have sufficient funds available.
Co-investment
The Board actively manages HGT's balance sheet in order to keep
it well invested but without taking unacceptable risk.
In addition to our commitments to Hg's vintages, we have also
agreed to a programme of co-investments in businesses held by Hg,
in addition to our core holdings. The Board and the Manager have
agreed to aim to have co-investments represent 10 to 15% of HGT's
NAV, even as our NAV continues to grow in coming years.
Currently, co-investments are valued at GBP143 million,
representing 14% of NAV as at 31 December 2019 - and we have agreed
three further co -- investments, totalling an estimated GBP19
million, in Argus Media, P&I and smartTrade since the period
end.
All our co-investments are free of management fees, reducing the
ongoing charges and free of carried interest.
Responsible investment
The Board fully understands and endorses the increasing emphasis
on responsible investment that wider society, and investors, expect
listed companies of all kinds to respect.
In particular, we understand the need to ensure that the
businesses we invest in reduce their carbon footprint and
contribute to tackling climate change. The sectors in which we
invest are unlikely to raise ethical issues and are not in
themselves large sources of carbon emission. However, the
technologies within our software businesses can assist other types
of business to make progress, as described in a case study below
(or on page 35 in the full Annual Report and Accounts).
During 2019, Hg itself was independently certified as a
Carbon-Neutral Company. I am pleased to report that the assessment
by UNPRI of Hg's approach to responsible investment increased from
AA to AA++ during the year.
Corporate governance
Our reporting on corporate governance is further expanded this
year. In particular, below we set out a full report on how we meet
the duties placed on directors under Section 172 of the Companies
Act. I am confident that we have always properly undertaken our
duties to shareholders and other stakeholders, considered our
impact on the community and environment, and taken a long-term
approach to the management of HGT. This new report brings together
in one place our beliefs, values and actions.
We are also committed to follow the AIC Code of Corporate
Governance and an expanded report on our compliance is set out on
pages 115 to 118 in the full Annual Report and Accounts.
During 2019 we agreed new policies on Board composition and
tenure and on maintaining the culture of HGT.
These policies are linked because it is important that we
maintain a culture of informed challenge and open debate by
ensuring that the Board has the right balance of experience and
fresh thinking. Our policy is to seek to recruit a new director
every two years or so, which is likely to result in an average
tenure of around six years, but we do not set a maximum tenure as
this could lead to the loss of valuable corporate knowledge.
In 2018 we recruited two new non-executive directors to the
Board. In 2019 the Board agreed a set of interlocking processes
that will lead to a further refreshing of the Board in 2020. I
indicated in our Interim Report that I intended to stand down as
Chairman in 2020. Accordingly, the Board's Nomination Committee,
led by Anne West, the Senior Independent Director, took
responsibility for the selection of a new Chair; her report on this
process appears on page 124 in the full Annual Report and
Accounts.
I am delighted to report that Jim Strang, who will stand for
re-election as a Director at the forthcoming AGM, will be appointed
as my successor.
Simultaneously, we began a review of the effectiveness of the
Board and its committees so that the conclusions would be available
as I hand over to my successor, giving the incoming Chair an
up-to-date and Independent analysis of the strengths and weaknesses
of the Board and identifying options for change; this effectiveness
review was externally facilitated by Trusted Advisor Partnership, a
specialist in this field. Thirdly, my retirement from the Board
creates a vacancy for a new director. The role profile and skill
set we seek are informed by insights from the effectiveness review.
Following the successful recruitment of two directors in 2018, the
Board has again retained nurole.com, an online and active
recruitment specialist, to conduct this search. Once again, we have
given clear instructions that they should to bring forward a
diverse range of candidates. The selection process is being led by
our Senior Independent Director and my successor as Chairman and I
am pleased to report that, at the time of writing, we have a long
list of 12 qualified candidates, well balanced between women and
men.
As a further element in our framework of good corporate
governance, at this year's AGM we will propose a resolution
extending the life of HGT by a further five years, matching the
investment period of the current range of funds to which we are
making commitments. The Board has confidence in the continuing
opportunity that HGT offers to investors and we recommend this
resolution to shareholders for their support.
______________________________________________________________________________________________________
"I remain confident that, thanks to the skill and resources of
Hg, the outstanding performance HGT has delivered throughout my
period of service will continue."
Roger Mountford, Chairman, HgCapital Trust plc
______________________________________________________________________________________________________
Risks and prospects
During 2019, we have carefully reviewed our risk management
framework, which we have strengthened to include an integrated view
of investment, financial, operational and external risks. Through
this framework the Board is able to ensure that HGT's portfolio of
investments are aligned to our risk appetite, and predictive and
preventative steps can be taken where necessary. This risk
management framework is an important element of the culture of the
Board and the relationship with the Manager.
At each meeting of the Board we receive detailed trading
information and reports on every business in our portfolio. Recent
reports have shown that, almost without exception, the investments
we hold are growing and trading well; in 2019 the top 20,
representing 92% of our portfolio, reported aggregate revenues of
GBP4.0 billion, EBITDA of GBP1.2 billion and an EBITDA margin of
29%, compared with 27% in 2018. With revenues growing by 24% p.a.
overall, these figures evidence the quality of our portfolio and
the effectiveness of Hg's processes.
It is, of course, too early to know the future trading
relationship between the UK and the EU, but as Hg and the Board
have said before, the businesses we own undertake little
cross-border trading and are therefore not greatly exposed to any
new friction in trade. We have some exposure to volatility in
exchange rates and have taken action to adopt a more sophisticated
approach to managing currency risk. At the time of writing, it is
impossible to forecast the scale and severity of the coronavirus
epidemic in China and elsewhere, or the impact it will have on
supply chains to the global manufacturing sector and thereby on the
global economy and capital markets. As we have no direct exposure
to the manufacturing or retail sectors, any effects on our
portfolio would be indirect, via levels of corporate investment in
software or valuation multiples. The automotive cluster is clearly
the most exposed to supply chain disruption for the OEMs and Hg is
monitoring this cluster especially closely.
As I prepare to step down at the forthcoming annual general
meeting I remain confident that, thanks to the skill and resources
of Hg, the outstanding performance HGT has delivered throughout my
period of service will continue. I take this opportunity to thank
all the partners and staff of Hg who have made such an impressive
contribution to HGT's success, and to my fellow directors past and
present for their wise counsel. My successor, Jim Strang, is
uniquely well qualified to lead the Board of HGT in the next stage
of its journey and I wish him and the Board and Hg continuing
success.
Roger Mountford
Chairman
6 March 2020
Investment objective and investment policy
The objective of HGT is to provide shareholders with consistent
long -- term returns in excess of the FTSE All -- Share Index by
investing predominantly in unquoted companies where value can be
created through strategic and operational change.
Investment policy
The policy of HGT is to invest, directly or indirectly, in a
portfolio of unlisted companies where Hg believes it can add value
through increasing organic growth, generating operational
improvements, driving margin expansion, reorganisation or by
acquisition to achieve scale. HGT seeks to maximise its
opportunities and reduce investment risk by holding a spread of
businesses diversified by end-market and geography.
Risk management
HGT has adopted formal policies to control risk arising through
excessive leverage or concentration. HGT's maximum exposure to
unlisted investments is 100% of the gross assets of HGT from time
to time. On investment, no investment in a single business will
exceed a maximum of 20% of gross assets. HGT may invest in other
listed closed -- ended investment funds up to a maximum at the time
of investment of 15% of gross assets.
Sectors and markets
As HGT's policy is to invest in businesses in which Hg can play
an active role in supporting management, Hg primarily invests in
companies whose operations are headquartered or substantially based
in Europe. These companies operate in a range of countries, but
there is no policy of making allocations to specific countries or
markets. Investments are made across a range of sectors where Hg
believes that its skills can add value, but there is no policy of
making allocations to sectors.
HGT may, from time to time, invest directly in private equity
funds managed by Hg where it is more economical and practical so to
do.
Leverage
Each underlying investment is usually leveraged but no more than
its own cash flow can support, in order to enhance value creation;
it is impractical to set a maximum for such gearing across the
portfolio as a whole. HGT commits to invest in new opportunities in
order to maintain the proportion of gross assets that are invested
at any time, but monitors such commitments carefully against
projected cash flows.
HGT has the power to borrow and to charge its assets as
security. The Articles restrict HGT's ability (without shareholder
approval) to borrow, to no more than twice HGT's share capital and
reserves, allowing for the deduction of debit balances on any
reserves.
Hedging
Part of HGT's portfolio is located outside the UK, predominantly
in Northern Europe, and a further part in businesses that operate
in US dollars. HGT may therefore hold investments valued in
currencies other than sterling. From time to time, HGT may put in
place hedging arrangements with the objective of protecting the
sterling translation of a valuation in another currency.
Derivatives are also used to protect the sterling value of the cost
of investment made or proceeds from realising investments in other
currencies, between the exchange of contracts and the completion of
a transaction.
Commitment Strategy
HGT employs a commitment strategy to ensure that HGT's balance
sheet is managed efficiently. The level of commitment is regularly
reviewed by the Board and Hg.
Liquid funds
HGT maintains a level of liquidity to ensure, so far as can be
forecast, that it can participate in all investments made by Hg
throughout the investment -- realisation cycle.
At certain points in that cycle, HGT may hold substantial cash
awaiting investment. HGT may invest its liquid funds in government
or corporate debt securities, or in bank deposits, in each case
with an investment grade rating, or in managed liquidity funds that
hold investments of a similar quality.
If there is surplus capital and conditions for new investment
appear to be unfavourable, the Board will consider returning
capital to shareholders, probably through the market purchase of
shares.
Any material change to HGT's investment objective and policy
will be made only with the approval of shareholders in a general
meeting.
Rationale and business model
The Board has a clear view of the rationale for investing in
unquoted businesses where there is the potential for accelerating
the growth in value through a private equity approach. This informs
its decisions on the operation of HGT and the evolution of HGT's
Business Model.
Rationale
The Board believes that there is a convincing rationale for
directly investing in well -- researched private businesses where
there is potential for substantial growth in value, especially
where there is the ability to work with management to implement
strategic or operational improvements.
By taking on the burdens of administration, monitoring and
accounting that such investments require, HGT offers a simple and
liquid means by which shareholders can achieve an investment in
unquoted growth companies, monitored by a Board of independent
Directors.
Business model
To achieve HGT's Investment Objective and within the limits set
by the Investment Policy, HGT is an investor in unquoted businesses
managed, and in most cases controlled, by the Manager. From time to
time, HGT may hold listed securities in pursuit of its Investment
Policy.
HGT is currently invested in more than 30 companies as set out
below (and on page 52 in the full Annual Report and Accounts),
ranging in size, sector and geography, providing
diversification.
The Board has delegated the management of HGT's investments to
Hg Pooled Management Limited (the 'Manager' or 'Hg'). Further
details of the terms of the management agreement are set out on
page 110 in the full Annual Report and Accounts. The Manager
invests predominantly in unquoted software and service businesses
in expanding sectors and provides portfolio management support.
Hg's review below (and on pages 23 to 75 in the full Annual Report
and Accounts) outlines how HGT's investments are managed on behalf
of HGT.
Most of HGT's investments are held through special-purpose
partnerships, of which it is the sole limited partner.
Periodically, HGT enters into a formal commitment to invest in
businesses identified by the Manager, alongside institutional
investors who invest in an Hg Limited Partnership Fund. Such
commitments are normally drawn down over three to four years. The
institutional investors and HGT invest on substantially identical
terms.
HGT is usually the largest investor in each business. The Board
has a further objective of keeping HGT as fully invested as is
practical, while ensuring that it will have the necessary cash
available when a new investment arises.
The Board, on the advice of the Manager, makes assumptions about
the rate of deployment of funds into new investments and the timing
and value of realisations. However, to mitigate the risk of being
unable to fund any draw -- down under its commitments to invest,
the Board has negotiated a right to opt out, without penalty, of
its obligation to fund such draw -- downs where certain conditions
exist.
HGT may also take up a co -- investment in some businesses (in
addition to the investment it has committed to make).
HGT has no liability to pay fees on such co -- investment and no
carried interest incentive is payable to the Manager on realisation
(currently 14% of HGT's NAV is in co -- investments). HGT may also
offer to acquire a limited partnership interest in any of Hg's
funds, in the event that an institutional investor wishes to
realise its partnership interest.
The Board regularly monitors progress in all the businesses in
which it is invested, and their valuation; the development of the
Manager's investment strategy; the resources and sustainability of
the business model.
Investment trust status
As HGT is constituted as an investment trust and its shares are
listed on the London Stock Exchange, it can take advantage of tax
benefits available to investment trusts. This allows HGT to realise
businesses from its portfolio without liability to corporation tax.
The Board intends to retain this status so long as it is in
shareholders' interest to do so. This will require the Board to
declare dividends so that not more than 15% of taxable income is
retained each year.
Performance targets
HGT's aim is to achieve returns in excess of the FTSE All --
Share Index over the long -- term. To this end, the Board monitors
the Key Performance Indicators, as set out above (or on pages 5 and
6 in the full Annual Report and Accounts). In the year to 31
December 2019, HGT's NAV per share increased by 20.8% on a total
return basis. The FTSE All -- Share Index increased by 19.2% on a
total return basis over the year. The twelve month total return of
HGT's share price was 47.5%. NAV per share has grown by 13.4% p.a.
compound over the last ten years and 13.1% p.a. compound over the
last twenty years. The share price has seen broadly similar
performance growing by 15.0% p.a. compound over the last ten years
and 14.7% p.a. compound over the last twenty years.
All of the above returns assume the reinvestment of all
historical dividends. The Board and the Manager aim to continue to
achieve consistent, long -- term returns in this range.
HGT is not managed so as to reflect short -- term movements in
any Index. The Board also regularly compares HGT's NAV and share
price performance against a basket of broadly comparable companies
with similar characteristics, listed on the London Stock
Exchange.
Dividends
In 2017, the Board announced that it anticipated that future
dividends would be no less than 4.6p (adjusted for the share split)
per share and that these would be split between an interim
distribution made in or around October, and a final distribution
made in or around April.
We are also revising our guidance and we anticipate total
dividends in future years to be not less than 4.8 pence per
share.
Where possible, the Trust has elected to 'stream' its income
from interest -- bearing investments as dividends for tax
efficiency purposes. More details can be found on page 134 in the
full Annual Report and Accounts.
Going concern
HGT's business activities, together with the factors likely to
affect its future development, performance and financial position
are described in the Board's Strategic Report and Hg's Review. The
financial position of HGT, its cash flows, liquidity and borrowing
facilities are described in the Strategic Report.
In addition, Note 19 to the financial statements describes HGT's
objectives, policies and processes for managing its capital; its
financial risk management objectives; details of its financial
instruments and hedging activities; and its exposures to credit
risk and liquidity risk. The Directors have considered the FRC
Guidance on Risk Management, Internal Control and Related Financial
and Business Reporting and believe that HGT is well placed to
manage its business risks successfully. The Directors review cash
flow projections regularly, including important assumptions as to
future realisations and the rate at which funds will be deployed
into new investments. The Directors have a reasonable expectation
that HGT will have adequate resources to continue in operational
existence for at least the next twelve -- month period from the
date of approval of this Report and be able to meet its outstanding
commitments. Accordingly, they continue to adopt the going concern
basis in preparing these results.
At this year's AGM the Board will propose a resolution to extend
the life of HGT by a further five years, matching the investment
period of the current range of funds to which HGT is making
commitments. The Board has confidence in the continuing opportunity
that HGT offers to investors and recommends this resolution to
shareholders for their support.
Long -- term viability statement
In accordance with provision 31 of the 2018 revision of the UK
Corporate Governance Code, the Directors have assessed the
prospects of HGT over a longer period than the twelve months
required by the 'Going Concern' test. The Board believes that the
appropriate period over which to assess HGT's viability may vary
from year to year, depending on a number of factors, notably its
outstanding investment commitments, which at year end run until
2020 -- 2021. In addition, the Board believes that it should assess
the viability of HGT over a minimum of five years and, accordingly,
has elected this year to assess HGT's viability over the five --
year period ending December 2024.
The key assumption which underpins our strategic planning is
that HGT's business model remains broadly unchanged and continues
to focus on investing in unquoted businesses managed by Hg.
Assessment of prospects
The Board has assessed HGT's prospects and long-term viability
with due consideration to:
-- HGT's position with reference to the business model ( above
and on pages 14 and 15 in the full Annual Report and Accounts);
-- the balance sheet, cash flow projections and availability of
funding (below and on pages 43 to 44, 78 and 94 in the full Annual
Report and Accounts )
-- HGT's contractual commitments (below and on page 44 in the full Annual Report and Accounts);
-- the principal risks and uncertainties associated with HGT,
including: performance; regulatory; operational; financial;
liquidity; and borrowing, as detailed below (and on pages 16 and 17
of the Strategic Report in the full Annual Report and
Accounts).
Sensitivity analysis
The Directors of HGT have looked at the sensitivity of the
business model against principal risks likely to have an impact
including:
-- Insufficient funds to meet commitments;
-- A downturn in the macro-economic environment; and
-- The effect of Brexit on HGT and the portfolio companies.
Based on this assessment, the Directors of HGT confirm that they
expect HGT will continue to operate and meet its liabilities, as
they fall due, during the five years ending December 2024.
Principal and emerging risks and uncertainties
During 2019 the Audit and Valuation Committee ('AVC') has
supported the Board in the creation of a strengthened Risk
Management Framework, undertaking a robust assessment of the
principal and emerging risks facing HGT.
Managing risk is fundamental to the delivery of HGT's strategy,
and this framework provides the rigour to assess and manage these
risks, the controls in place to mitigate them, including those that
would threaten its business model, future performance, solvency,
valuation, liquidity or reputation.
The Board has defined risk appetite statements for each of the
risks faced during the course of business. By assessing the impact
and likelihood of each risk against HGT's appetite, we ensure that
focus is maintained on the risks that require most attention, and
that mitigating actions are progressed.
This process involves the maintenance of a risk register, which
identifies the risks facing HGT and assesses each risk and
classifies the likelihood of the risk and the potential impact of
each risk on HGT. The Board has established controls to mitigate
against risk faced by HGT. The AVC regularly reviews the policies
for managing each risk, as summarised below.
HGT considers its principal risks (as well as underlying risks)
in four main categories:
Investment - the risk to HGT of an inappropriate investment
strategy or Manager decisions leading to poor performance.
Financial - a range of risks that include valuation risk and
liquidity risk ensuring the availability of sufficient liquid
resources for HGT to meet its commitments.
Operational - the monitoring of regulation, Hg's internal
controls systems and those of HGT's other service providers.
External - macro-economic conditions, foreign currency, availability of credit.
Potential Potential Mitigation Trend
risk impact
------------- ------------------------------- ----------------------------------------------------------- ---------
Investment
------------------------------- ----------------------------------------------------------- ---------
Performance: Neutral
The * Reduction in NAV * Deployment of capital is a rigorous process
underlying determined by the Hg Investment Committee operated by
portfolio experienced investment professionals.
companies * Reputation loss
underperform
due to poor * The HGT AVC values the portfolio quarterly.
Manager * Shareholders sell shares
investment
decisions.
* Equity reduced
------------- ------------------------------- ----------------------------------------------------------- ---------
Performance: Reducing
The * Reduction in NAV * Portfolio performance is reviewed regularly by Hg's
underlying Realisation Committee comprised of experienced
companies investment professionals.
underperform * Reputation loss
due to weak
operational * The Board monitors the performance of Hg's portfolio
support from * Shareholders sell shares through regular reporting (including trading,
the Manager. compliance and finance).
* Equity reduced
* An operational performance group interacts across the
portfolio to drive performance.
------------- ------------------------------- ----------------------------------------------------------- ---------
Potential risk Potential Mitigation Trend
impact
--------------- ----------------------------------------------------------- ----------------------------------------------------------- -----------
Financial
----------------------------------------------------------- ----------------------------------------------------------- -----------
Valuations: Neutral
In valuing * Create a false market in HGT shares * All valuations are prepared in accordance with IPEV
its guidelines, unless these differ from UK GAAP or
investments company law when the accounting standards apply.
and publishing * Reputation loss
its NAV, HGT
relies to a * The Manager's Valuation Committee, independently
significant * Reduced shareholder loyalty chaired, reviews and approves valuations on a
extent on the quarterly basis.
accuracy of
financial and * Impact on liquidity and ability to raise equity
other * The auditors of both Hg and HGT review the valuation
information and methodology as part of their audit procedures
provided by which are reviewed in detail by the HGT AVC and put
the Manager. to the Board of HGT for approval.
Wrong
valuations
would lead to * Hg's finance team conducts detailed reviews of all
a misleading reporting materials published to ensure their
NAV. accuracy.
--------------- ----------------------------------------------------------- ----------------------------------------------------------- -----------
The Balance Increasing
Sheet: * Reputation * Forward cash flows are closely monitored by the Board
The inability and Hg.
of HGT to make
investments * Risk to future performance
due to * Borrowing structures and cash flow forecasts are
insufficient considered at each HGT Board meeting.
liquid
resources
available. * Current GBP80m bank facility as a short-term bridge
if required.
* There is the opt-out facility available across all
investing funds.
--------------- ----------------------------------------------------------- ----------------------------------------------------------- -----------
The Balance Neutral
Sheet: * Insufficient borrowing to meet commitments * A bank facility is in place to facilitate orderly
Borrowing management of the balance sheet.
facilities
available to * Potential for rising interest rates
potentially * There is the opt-out facility across all investing
underwrite funds.
future * Increased cost
commitments
made by the
board of HGT.
--------------- ----------------------------------------------------------- ----------------------------------------------------------- -----------
Operational
----------------------------------------------------------- ----------------------------------------------------------- -----------
Regulation: Neutral
It is in * Increased corporation tax leading to higher fees and * The Manager monitors investment movements, the level
shareholders' potential impact on valuation and performance of HGT and type of forecast income and expenditure, and the
interests to amount of retained income (if any) to ensure that the
retain the tax provisions of Sections 1158 and 1159 of the CTA are
advantages not breached. HGT's compliance with the conditions
that for retaining investment trust status is certified by
flow from the Manager at each meeting of the Board.
meeting
the
requirements
for an
investment
trust under
the
Corporation
Tax Act 2010.
--------------- ----------------------------------------------------------- ----------------------------------------------------------- -----------
Regulation: Neutral
General * Misunderstood or misreported regulation leading to * Strong shareholder engagement from:
changes reduced demand for shares
in
legislation, * Dedicated investor relations team
regulation or * Lack of adherence to regulation leading to
government Reputational risk
policy * Corporate Broker
could
influence
the decisions * Company Secretary
of investors.
Lack of
adherence * All these are regularly reviewed by the Board.
to changing
regulations.
--------------- ----------------------------------------------------------- ----------------------------------------------------------- -----------
Manager Neutral
Internal * Reputational risk * The Manager is regulated by the FCA, whose rules and
Controls and regulations impose exacting behavioural standards on
Processes: Hg.
The risk that * Shareholders sell shares
the Manager's
processes are * The Manager has controls in place including those
not adequate * Equity reduced related to investment decisions; portfolio reviews;
leading to recruitment, training & promotions; financial
poor performance and payments; protection of client
performance, assets; compliance; and regulation.
weak service
or
non-compliance * The Board of HGT regularly reviews these processes
to regulation. and controls.
--------------- ----------------------------------------------------------- ----------------------------------------------------------- -----------
Cyber Increasing
security: * Loss of or lack of control over data due to cyber * A cyber security team is in place at the Manager to
Cyber security attacks monitor and recommend improvements in cyber security
risk at Hg and across Hg and the portfolio companies.
portfolio
level * Reputational risk
given * Most recently, the GDPR committee has successfully
increasing implemented mandatory training for all staff.
sophistication * Regulatory risk
of threats in
this area and
the types of
companies in
which HGT
invests.
--------------- ----------------------------------------------------------- ----------------------------------------------------------- -----------
Potential risk Potential Mitigation Trend
impact
--------------- ------------------------------------------------------------ ----------------------------------------------------------- -----------
External
------------------------------------------------------------ ----------------------------------------------------------- -----------
Political Neutral
and * Reduction in demand for shares based on lack of * Hg's portfolio is well protected given focus on
macro-economic confidence in listed markets mission critical products with a fragmented customer
uncertainty: base.
Impacts from
the UK leaving
the EU * The Manager remains focused on the various issues
affecting that may need to be addressed, including:
HGT and the
portfolio
companies * Reduced availability of credit to fund future
in which it investments
is invested.
* Regulation, marketing, trade and foreign exchange
movements
These are regularly monitored by the
Board of HGT.
--------------- ------------------------------------------------------------ ----------------------------------------------------------- -----------
Foreign Neutral
exchange: * Valuations lowered by negative currency movements * The Board of HGT regularly monitors currency
Hg has fluctuations.
continued
to expand its * Valuations increased by positive currency movements
geographic * All transactions are hedged between signing and exit.
diversity,
accordingly,
some
investments
are
denominated
in other
currencies
as well as
sterling.
--------------- ------------------------------------------------------------ ----------------------------------------------------------- -----------
Global Increasing
pandemic * Operations are disrupted by reduced resources * The majority of revenues are derived from
subscription based, recurring revenues for
non-discretionary technology platforms.
* Revenues decrease due to reduced sales effectiveness
* Multiples of listed
companies
applied to
valuations
might be adversely
affected
--------------- ------------------------------------------------------------ ----------------------------------------------------------- -----------
Environmental, Social and Governance Matters
Socially responsible investment
The Board has endorsed Hg's policy to invest in a socially
responsible manner, as set out below (and on pages 32 to 33 in the
full Annual Report and Accounts) and on their website at
www.hgcapital.com/responsibility. HGT's focus is on identifying
high -- quality and sustainable businesses, and supporting their
growth for the benefit of shareholders and wider society. The Board
monitors investment activity to ensure they are compatible with
these policies.
HGT has no employees and has limited direct impact on the
environment. HGT aims to conduct itself responsibly, ethically and
fairly and has sought to ensure that Hg's management of investments
takes account of social, environmental and ethical factors where
appropriate. The sectors in which the Manager invests do not
generally raise material ethical issues.
Employees, human rights and community issues
The Board recognises the requirement under section 414C of the
Companies Act 2006 to provide information about employees, human
rights and community issues, including information in respect of
any policies it has in relation to these matters and their
effectiveness. These requirements do not apply to HGT as it has no
employees, all of the Directors are non -- executive and it has
outsourced all its functions to third party providers. HGT has
therefore not reported further in respect of these provisions.
Modern Slavery
HGT has no employees of its own. The Directors are satisfied
that, to the best of their knowledge, Hg complies with the
provisions of the UK Modern Slavery Act 2015. For further
information please visit:
https://hgcapital.com/wp-content/uploads/2019/10/ModernSlavery2019.pdf
Diversity
All financial decisions are made under conditions of
uncertainty. The Board recognises the value of both identity and
cognitive diversity in ensuring that varied perspectives are
considered when making decisions.
The Board places value on attracting directors with diverse
outlooks and experience. The skills and experience that the current
members of the Board bring to HGT's leadership are described on
pages 108 to 109 in the full Annual Report and Accounts . The
Board's policy is to make appointments to the Board to achieve the
balance of skills, outlook and experience needed and to do so
solely on merit. At the end of the year under review, the Board of
Directors of HGT comprised five men and one woman. HGT seeks to
enhance diversity and looks for the best qualified male and female
candidates. The Manager has an equal opportunities policy and
currently employs 111 men and 81 women. Nic Humphries, Senior
Partner, Hg, is a member of the Level 20 Advisory Council, a not --
for -- profit organisation that aims to inspire more women to join
and succeed in the European private equity industry. Details of
Hg's diversity and inclusion initiatives can be found below and on
page 31 in the full Annual Report and Accounts.
Directors' duties
______________________________________________________________________________________________________
Section 172 of the Companies Act 2006
Section 172 of the Companies Act 2006 (the 'Act') requires
directors to act in good faith and in a way that is the most likely
to promote the success of HGT. In doing so, directors must take
into consideration the interests of the various stakeholders of
HGT, the impact HGT has on the community and the environment, take
a long-term view on consequences of the decisions they make, as
well as aim to maintain a reputation for high standards of business
conduct and fair treatment between the members of HGT.
______________________________________________________________________________________________________
Fulfilling this duty naturally supports HGT in achieving its
Investment Objective and helps to ensure that all decisions are
made in a responsible and sustainable way. In accordance with the
requirements of the Companies (Miscellaneous Reporting) Regulations
2018, below, the Board explains how the Directors have individually
and collectively discharged their duties under section 172 of the
Act over the course of the reporting period.
To ensure that the Directors are aware of, and understand, their
duties, they are provided with a tailored induction, including
details of all relevant regulatory and legal duties as a Director
of a UK public limited company when they first join the Board, and
continue to receive regular and ongoing updates and training on
relevant legislative and regulatory developments. They also have
continued access to the advice and services of the Company
Secretary and, when deemed necessary, the Directors can seek
independent professional advice. The schedule of Matters Reserved
for the Board, as well as the Terms of Reference of its committees
are reviewed annually and further describe Directors'
responsibilities and obligations and include any statutory and
regulatory duties.
Culture
During the year, the Directors also considered and defined HGT's
culture and values and have worked to incorporate these behaviours
and processes into the annual review of the Manager, strategic
planning, the annual evaluation of Board effectiveness and
reporting to stakeholders - thus embedding consideration of
stakeholders' interests, long-term perspective, maintaining
reputation for fairness and high standards of governance, corporate
reporting and business conduct more generally in HGT's culture and
processes.
Decision-making
The importance of stakeholder considerations, in particular in
the context of decision-making, is regularly brought to the Board's
attention by the Company Secretary and taken into account at every
Board meeting, and a paper reminding Directors of that is tabled at
the start of every Board meeting. For example, the strategic
planning discussions involve careful considerations of the
longer-term consequences of any decisions and their implications on
shareholders and other stakeholders, and are supported by detailed
cash flow projections based on various scenarios, which include:
assumptions around HGT's contractual commitments; availability of
funding; borrowing; foreign currency management; as well as the
wider economic conditions and market performance.
Community and Environment
The Board recognises that HGT has a responsibility to its
shareholders, stakeholders and wider society. The Board endorses
Hg's policy to invest HGT's funds in a socially responsible manner.
This includes the desire that the businesses Hg invests in are
genuinely focused on making a positive contribution to all
stakeholders including employees, customers, suppliers,
shareholders and the wider society. Responsible investing also
means investing in growth companies and sectors, rather than
turnaround or distressed investing. Hg has been a signatory of the
UN Principles for Responsible Investment ('UNPRI') since 2012 and
the Board has welcomed Hg's continuing commitment to set ambitious
goals for various aspects of environmental, social, and governance
('ESG') matters. Further details on how Hg integrates responsible
investing into the investment process can be found below (or on
page 32 in the full Annual Report and Accounts).
The Board and Hg also recognise the impact climate change has on
the environment and society. The Manager is committed to measuring
and managing the carbon emissions associated with its business
operations, although a large part of Hg's impact is generated by
the portfolio companies. Hg therefore continues to work with them
to raise awareness on climate change risks, carbon emission and
energy efficiency. Hg is a certified Carbon Neutral company,
committing to zero emissions by offsetting its entire carbon
footprint.
The Board monitors investment activity to ensure it is
compatible with the policy and receives periodic updates from the
Manager on its initiatives and performance against its ESG goals.
The Hg Responsible Investment Report 2018, Hg Responsible
Investment Policy 2019 and Hg 2019 Carbon Footprint Report can be
found on Hg's website: https://hgcapital.com/responsibility/
Business Conduct
HGT aims to conduct itself responsibly, ethically and fairly and
has sought to ensure that Hg's management of investments takes
account of social, environmental and ethical factors where
appropriate. As described below (or on page 22 in the full Annual
Report and Accounts), in 2019 the Directors considered HGT's
purpose and values and defined the Board's culture, the desired
elements of it and ways to assess and monitor them. The Directors
agree that establishing and maintaining a healthy corporate culture
in amongst the Board and in its interaction with the Manager,
shareholders and other stakeholders will support the delivery of
its purpose, values and strategy.
The Matters Reserved for the Board, Board committees' terms of
reference, the Share Dealing and other Board policies are all
reviewed on at least an annual basis, and the Directors ensure that
they appropriately define obligations and correct procedures.
The Report of the Audit & Valuation Committee, which can be
found on pages 119 to 121 in the full Annual Report and Accounts,
further explains how the Committee reviews the risk management and
internal controls of HGT. This includes reasonably satisfying
itself that relevant systems and controls in place remain effective
and appropriate, that the Manager sets an appropriate 'control
culture', and that Hg's whistleblowing procedures, Anti -- Bribery
and Anti-Corruption policies are in place. Hg's Compliance Manager
attends meetings to attest to the Board how Hg complies with these
polices.
Stakeholders
The Board seeks to understand the needs and priorities of HGT's
stakeholders and these are taken into account during all of its
discussions and as part of its decision-making. While as an
externally managed investment firm HGT does not have any employees
or customers, the Board recognises its key stakeholders and the
Board's beliefs and actions in relation to each group of
stakeholders are described in the table below:
Stakeholders Why they are important Board engagement
------------- ----------------------------- ------------------------------------------------------------
Shareholders Continued shareholder HGT has circa 900 shareholders, including
support and engagement institutional and retail investors. Over
are critical to the the years, HGT has developed various ways
continuing existence of engaging with its shareholders, in order
of the business and to gain an understanding of their views.
the delivery of its These include:
long-term strategy * Annual General Meeting - HGT welcomes attendance from
of its business. shareholders at our AGM. The Manager delivers a
A resolution to continue presentation and all shareholders have the
the life of HGT is opportunity to meet the Directors and ask questions.
put to the shareholders The Board really values the feedback and questions it
every five years. receives from shareholders and takes action or makes
Having last been changes, when and as appropriate;
approved by shareholders
at its AGM in 2015,
a similar resolution * Presentations - The annual and interim results
will be put to shareholders presentations, as well as quarterly reports and
for approval at the monthly Factsheets are available on HGT's website,
upcoming AGM in 2020. and their availability is announced via the stock
exchange. Feedback and/or questions HGT receives from
the shareholders help HGT to evolve its reporting,
aiming to render the reports and updates transparent
and understandable;
* Investor Relations updates - at every Board meeting,
the Directors receive updates on the share trading
activity, share price performance and any
shareholders' feedback, as well as any publications
or comments in the press. To gain a deeper
understanding of the views of its shareholders and
potential investors, the Manager also undertakes
Investor Roadshows following publication of HGT's
results and an annual Capital Markets event. From
time to time, the Board also commissions a perception
study based on in-depth interviews of shareholders,
analysts and other stakeholders. Their feedback is
then taken into account when Directors discuss the
share capital, any possible fundraisings or the
dividend policy and put into action, if appropriate.
The willingness of the shareholders, including the
partners and staff of the Manager, to maintain their
holdings over the long term period is another way for
the Board to gauge how HGT is meeting its objectives;
* Working with external partners - the Board also
engages some external providers, such as investor
communications advisors to obtain a more detailed
view on specific aspects of shareholder
communications, such as developing more effective
ways to communicate with investors.
An example of how the investment community
feedback was heard and acted upon was the
Board's decision to publish a dividend
policy and introduce interim dividends
in 2017. At the time, the Board recognised
that, while HGT's assets are managed to
achieve long-term growth in shareholder
value, in a period of low interest rates
and yields many shareholders wished to
have some certainty about the likely levels
of dividend payments. More recently, the
Board also initiated a 10 for 1 share split
to make trading in the shares easier, especially
for retail investors.
------------- ----------------------------- ------------------------------------------------------------
Service providers, including:
-------------------------------------------- ------------------------------------------------------------
The Manager Holding HGT's shares Maintaining a close and constructive working
offers investors relationship with the Manager is crucial
a liquid investment as the Board and the Manager both aim to
vehicle through which continue to achieve consistent, long-term
they can obtain exposure returns in line with its investment objective.
to Hg's diversified Important components in the collaboration
portfolio of private with the Manager, consistent with the Board's
equity investments. culture, are:
The Manager's performance * Encouraging open discussion with the Manager;
is critical for HGT
to deliver its investment
strategy successfully * Recognising that the interests of shareholders and
and meet its objective the Manager (as well as its other clients) are for
to provide shareholders the most part well aligned, adopting a tone of
with consistent long constructive challenge, balanced when those interests
-- term returns in are not fully congruent by robust negotiation of the
excess of the FTSE Manager's terms of engagement;
All -- Share Index.
* Drawing on Board Members' individual experience to
support the Manager in its monitoring and change
management of portfolio companies, for the benefit of
all the Managers' clients; and
* Willingness to make the Board Members' experience
available to support the Manager in the sound,
long-term development of its business and resources,
recognising that the long-term health of the Manager
is in the interests of shareholders in HGT.
------------- ----------------------------- ------------------------------------------------------------
Stakeholders Why they are important Board engagement
----------------- ------------------------------ ----------------------------------------------------
Service providers, including
(continued):
------------------------------------------------- ----------------------------------------------------
The Company In order to function The Board maintains regular contact with
Secretary, as an investment its key external providers, both through
the Registrar, trust with a premium the Board and committee meetings, as well
the Depositary, listing on the London as outside of the regular meeting cycle.
the Broker, Stock Exchange, HGT Their advice, as well as their needs and
the Asset relies on a diverse views, are routinely taken into account.
Manager range of advisors In addition, the Management Engagement
to support meeting Committee, tasked with periodic reviews
all relevant obligations. of the external service providers, also
holds relationship meetings and formally
hears, and acts on, their feedback, as
appropriate.
----------------- ------------------------------ ----------------------------------------------------
Lenders Availability of funding Considering how important the availability
and liquidity are of funding is, HGT aims to demonstrate
crucial to HGT's to lenders that it is a well-managed business,
ability to take advantage and in particular, that the Board focuses
of investment opportunities regularly and carefully on the management
as they arise. of risk.
----------------- ------------------------------ ----------------------------------------------------
Institutional The evolving practice Recognising the principles of stewardship,
Investors and support (or lack as promoted by the UK Stewardship Code,
and proxy thereof) of the major the Board welcomes engagement with all
advisers institutional investors of its investors. The Board recognises
and proxy adviser that the views, questions from, and recommendations
agencies are important of many institutional investors and proxy
to the Directors, adviser agencies provide a valuable feedback
as HGT aims to maintain mechanism and play a part in highlighting
its reputation for evolving shareholders' expectations and
high standards of concerns. As an example, the Chairman has
corporate governance, frequently engaged directly with institutional
which contributes investors and proxy advisors regarding
to the long-term resolutions that were proposed to HGT's
sustainable success shareholders at AGMs.
of HGT.
----------------- ------------------------------ ----------------------------------------------------
Regulators HGT can only operate HGT regularly considers how it meets various
with the approval regulatory and statutory obligations and
of its regulators follows voluntary and best-practice guidance,
who have a legitimate whilst being mindful of how any governance
interest in how HGT decisions it makes can have an impact on
operates in the market its shareholders and wider stakeholders,
and treats its shareholders. in the short and in the longer-term. This
year, HGT carefully considered the results
of the review of HGT's Annual Results and
Accounts for the year ended 31 December
2018, undertaken by the Conduct Committee
of the Financial Reporting Council ('FRC')(1)
. The FRC had not raised any questions
or queries but did make some recommendations
of improvements to our existing disclosures
where they believed this would benefit
the users of the accounts. The Directors
welcomed the feedback, and where appropriate,
the disclosures in this Annual Report and
Accounts have been enhanced, incorporating
the FRC's suggestions.
----------------- ------------------------------ ----------------------------------------------------
(1) The FRC's review was based solely on HGT's 2018 Annual
Report and Accounts and did not benefit from detailed knowledge of
HGT's business or an understanding of the underlying transactions
entered into.
Culture
During 2019, the Directors considered and defined HGT's culture,
purpose and values. By formally identifying the important elements
of HGT's culture, the Directors are able to assess and monitor it
and ensure that it remains well aligned with HGT's purpose, values
and strategy.
The culture of an externally managed investment trust is the
product of the Board's diversity and behaviours, the values and
behaviours of the Manager, and the way in which the Board and the
Manager interact with each other and with stakeholders' of HGT.
Purpose, value and strategy
The Purpose of HGT is to deliver to shareholders consistent
long-term returns in excess of the FTSE All-Share Index by
investing predominantly in unquoted companies where value can be
created through strategic and operational change. Through its
Manager, HGT provides shareholders with exposure to a fast-growing
network of unquoted investments, primarily in European software and
service businesses. In providing access to investments not
otherwise usually available to its shareholders, the HGT's values
focus on transparency and clarity in its reporting, constructive
challenge in maintaining a strong relationship with the Manager,
and mitigating avoidable risk. The Board's strategy is to work
closely with its selected Manager in a long-term relationship
designed to support and encourage the Manager to build and maintain
the skills and resources to deliver long-term, consistent returns
through a concentrated portfolio of carefully selected
businesses.
The Directors recognise the value in sustaining a culture that
contributes to achieving the purpose of HGT in a way that is
consistent with its values and strategy. Elements of culture
include:
-- Encouraging open and timely discussion within the Board and
with the Manager, allowing time and space for original and
innovative thinking;
-- Ensuring that the interests of shareholders and the Manager
(and its other clients) are well aligned, adopting a tone of
constructive challenge, balanced when those interests are not fully
congruent by robust negotiation of the Manager's terms of
engagement;
-- Drawing on Board Members' individual experience to support
the Manager in its monitoring and change management of portfolio
companies, for the benefit of all the Managers' clients;
-- Willingness to make the Board Members' experience available
to support the Manager in the sound long-term development of its
business and resources, recognising that the long-term health of
the Manager is in the interests of shareholders in HGT;
-- Appreciating that the asset class, as well as the individual
businesses in which HGT invests, are not well understood by all
shareholders, adopting a policy of maximum transparency, consistent
with the commercial interests of the portfolio companies, and
clarity in reporting;
-- Willingness to use all available means to communicate with
shareholders and potential investors, and to meet shareholders and
consider their views; and
-- Acceptance that the prime purpose of HGT is to provide an
efficient vehicle through which shareholders gain exposure to a
well-managed, concentrated and leveraged portfolio and that the
Board should not seek to add further investment risk.
A healthy corporate culture contributes to the long-term success
of HGT. The following observable outcomes may be indicative of the
Directors' success in embedding a healthy corporate culture in
HGT's processes and policies, and actively promoting it through
their behaviours:
-- Continued support for HGT's shares and good, consistent
trading performance;
-- The breadth and quality of the share register, including
willingness of shareholders to maintain their holdings over the
long term rather than trade them short term;
-- The extent to which the partners and staff of the Manager are
willing to be long-term shareholders in HGT;
-- Recognition of the transparency and clarity of reporting for
HGT's reports to shareholders and disclosed on its website; and
-- Recognition of the quality of the HGT's shares as an
investment by the number of broker recommendations as a long-term
hold.
The Board has worked to incorporate these behaviours and
processes into the annual review of the Manager, strategic
planning, the annual evaluation of Board effectiveness and
reporting to stakeholders. These tend to embed the consideration of
stakeholders' interests, a long-term perspective, the maintenance
of a reputation for transparency and high standards of governance,
corporate reporting and business conduct more generally into the
HGT's culture and processes.
For and on behalf of the Board
Roger Mountford
Chairman of the Board
6 March 2020
Hg's review
Building businesses that change how we all do business
Hg is a specialist private equity investor focused on software
and service businesses.
Our business model combines deep sector specialisation with
dedicated operational support. Hg invests in growth companies in
expanding sectors, primarily via leveraged buyouts in businesses
with operations in or across Europe.
Hg's vision is to be the most sought-after private equity
investor within our sector focus, being a partner of choice for
management teams, to provide consistent, superior returns for HGT
and our other clients whilst providing a rewarding environment for
Hg colleagues.
References in this Annual Report and Accounts to the
'portfolio', 'investments', 'companies' or 'businesses', refer to a
number of investments, held as:
-- indirect investments by HGT through its direct investments in
fund limited partnerships (HGT LP, HGT 6 LP, HGT 7 LP, HGT 8 LP,
HgCapital Mercury D LP ('Hg Mercury'), HGT Mercury 2 LP, HGT Saturn
LP and HGT Transition Capital LP) of which HGT is the sole Limited
Partner;
-- a secondary purchase of a direct interest in Hg's Genesis 6
fund through HgCapital 6E LP ('Hg6E'), in which HGT is a Limited
Partner; and
-- direct investments in renewable energy fund limited
partnerships (Asper Renewable Power Partners LP ('Asper RPP I LP')
and Asper Renewable Power Partners 2 C LP ('Asper RPP II LP'), of
which HGT is a Limited Partner.
Hg Pooled Management Limited was authorised as an Alternative
Investment Fund Manager with effect from 22 July 2014.
For further details, refer to pages 130 to 132 in the full
Annual Report and Accounts.
About Hg
Overview
Hg began life as Mercury Private Equity, the private equity arm
of Mercury Asset Management plc. Mercury Asset Management was
acquired by Merrill Lynch in 1997. In December 2000, the executives
of Mercury Private Equity negotiated independence from Merrill
Lynch, and Hg was established as a fully independent partnership,
owned entirely by its Partners and employees.
Since then, Hg has worked hard to develop a unique culture and
approach - setting us apart from other investors. We are committed
to building businesses that change the way we all do business,
through deep sector specialisation and dedicated and strategic and
operational support.
Today, Hg has close to 200 employees representing the largest
technology investment team in Europe.
We have three investment offices based in London, Munich and New
York, with funds under management of around GBP11 billion and
serving more than 100 highly regarded institutional investors,
including private and public pension funds, insurance companies,
endowments and foundations.
Hg is itself an entrepreneurially led, fast growing business,
100% owned and managed by its Partners.
HGT is the largest client of Hg, which has been contracted to
manage HGT's assets since 1994 and offers investors a liquid
investment vehicle, through which they can obtain exposure to Hg's
diversified network of unquoted investments with minimal
administrative burdens, no long -- term lock up or minimum size of
investment, and with the benefit of a Board of independent
Directors and corporate governance. HGT's strategy is to invest in
parallel with all of Hg's current funds.
Investment strategy
Hg's investments are primarily focused on defensive growth
buyouts in software and service businesses operating in specific
end-market 'clusters' with enterprise values ('EVs') of GBP50m to
over GBP5bn, growing faster than the broader economy. We
predominantly seek controlling buyout investments in Northern
European headquartered businesses, though such companies will often
have a global footprint and customer base.
Hg's objective is to pursue investment theses supporting
long-term growth, leveraging its expertise working in these sectors
to implement initiatives designed to maximise organic expansion, as
well as through rolling up fragmented sectors, over typical hold
periods of approximately five years.
Hg has led over 100 investments in the software and service
sector during the last 25 years. This focus means we have developed
an institutional expertise and a deep understanding of the markets
and businesses in which we invest.
Hg applies a rigorous approach when evaluating all investment
opportunities. Our objective is to invest in the most attractive
businesses, rather than be constrained by a top -- down asset
allocation.
This flexible approach to investment means that, at any given
time, the Hg portfolio is likely to comprise more than thirty
software and service businesses with similar characteristics, but
of different sizes, end-market focus, and maturity profiles.
Hg's new office in New York will also enhance the ability to
crystallise and develop transatlantic investment opportunities,
manage existing investments and make bolt-on acquisitions; as well
as continue to engage with - and ultimately sell - portfolio
companies to North American trade buyers. As the US has the largest
technology sector, this also helps consolidate Hg's position as
Europe's leading software investor.
Hg Saturn
2018 - Large -- cap (EVs focus: >GBP1bn)
-- Fund size: GBP1.5bn
-- Typical hold: GBP400m-GBP500m
Hg Genesis
2017 - Mid -- market (EVs: GBP250m-GBP1bn)
-- Fund size: GBP2.5bn
-- Typical hold: GBP100m-GBP250m
Hg Mercury
2017 - Lower mid -- market (EVs: GBP50m-GBP250m)
-- Fund size: GBP575m
-- Typical hold: GBP30m-GBP60m
Transition Capital
2018 - Lower mid -- market (EVs: GBP50m-GBP250m)
-- Fund size: GBP75m
-- Typical hold: GBP15m-GBP30m
One strategy over four funds across the size range in software
& service businesses
HGT has made commitments to invest on the same financial terms
as all institutional investors in Hg funds, with investments made
into businesses with enterprise values ranging from GBP50 million
to over GBP5 billion.
The Power of the Portfolio
Hg has a unique approach and strategy, with a focus on achieving
scale in tightly defined clusters of expertise.
As a result, we have assembled a large portfolio of companies
and business models that share similar characteristics but differ
in size and maturity. This creates a natural environment for
knowledge sharing, creating a network effect to drive best
practices and value creation initiatives. This is why we believe in
collaboration and the 'power of the portfolio'.
This scale and focus enables our businesses to benefit from
being part of one larger organisation, whilst retaining their own
identity with each management team incentivised by their own
success.
______________________________________________________________________________________________________
On an aggregated basis, the Hg portfolio would represent the
fourth largest, and fastest growing, software business in
Europe.
______________________________________________________________________________________________________
The 'Hg sweet-spot' business model
Hg has a clear and robust business model, focused on long --
term consistent and defensive growth, predominantly through
investment in buyouts with a Northern European angle. We seek
companies that share similar characteristics, often providing a
platform for merger and acquisition ('M&A') opportunities.
We believe that such companies have the potential for
significant performance improvement.
We invest primarily in two main market sectors:
Software
Software is our largest sector of investment. We focus on
businesses providing B2B vertical market application software and
data, regulatory software and fintech and internet
infrastructure.
We have invested in high -- quality, industry champions which
have strong sector reputations, diverse customer bases, and which
feature subscription -- based business models generating
predictable revenues and cash flows. With more than 25 software
investments in our portfolio, we bring a unique set of networks and
insights to help support value creation in our businesses.
Services
Our services investments focus on companies with high levels of
intellectual property, large fragmented customer bases, long --
term and stable customer relationships, and businesses which
provide business -- critical services, preferably on a repeat or
recurrent basis.
We target businesses with strong reputations within a niche, and
we aim to grow and scale these businesses, either organically
within existing markets or through acquisitions.
Deep knowledge and networks within our end-market clusters
Hg has a unique approach and strategy, with a focus on achieving
scale in tightly defined clusters of expertise. This specialisation
helps us to build deep know-how.
Tax & Accounting 15 years
Team System , Visma, Sovos Compliance , Cogital Group , IRIS
ERP & Payroll 12 years
Team System, P&I, Visma, Access, IRIS, Transporeon
Legal & Regulatory Compliance 12 years
Achilles, Trace One, STP, Citation, Mitratech, Litera
Automotive 11 years
Eucon , Mobility Holding
SME Tech & Services 9 years
Commify, Register, IT Relation, team.blue
Capital Markets & Wealth Management IT 6 years
FE Fundinfo
Insurance 6 years
A-Plan Group , Eucon
Healthcare IT 5 years
Evaluate, Allocate, MediFox, Lyniate
Note: Number of years refers to the number of years that Hg has
invested in each cluster
Working together
Sharing Hg know-how and experience
By virtue of the fact that Hg repeatedly invests in specific
business models, our dedicated Portfolio Team has been able to
tailor a differentiated approach to driving value creation during
our ownership. Following each investment, our Portfolio Team works
with the management of our investee companies to focus on a set of
operational levers that are key to performance in an 'Hg sweet --
spot' business model: growth, digital marketing, value creation,
customer success, technology, cyber security, product data
analytics and talent. For each of these levers, the Portfolio Team
has codified the Hg experience and best -- practices into set
'plays' which are deployed in collaboration with management.
Every company can access the team, but the nature of support can
take a variety of forms. Often, members of our Portfolio Team
provide direct support, taking on roles to help the business pursue
growth more quickly. Another option is for our experienced industry
experts to mentor senior executives, helping them build more
scalable functions.
In other instances, the support comes through introducing
management teams to their counterparts in other companies in which
Hg is invested, specifically those who have faced comparable
challenges.
Our focus areas
From sharing best-practice 'playbooks' and resources, through to
tailored teams of technical experts, we work closely with the
companies we invest in to make sure they get the tools and guidance
they need for business success.
-- Growth
-- Technology, Product & Offshoring
-- Talent & Organisation
-- Data Analytics
-- Finance & M&A
-- Transformation
-- ESG & Sustainability
-- Reporting & Communities
Working together
We view all of our business management teams as a part of the Hg
portfolio community. And that means promoting a culture of working
together to share ideas, experiences, advice and best-practice.
One of the most powerful ways the Portfolio Team motivates
change is through peer -- to -- peer collaboration. This gives the
management teams of our portfolio companies the ability to exchange
ideas, insights, share best practice and learnings with others in
the Hg portfolio and our external network of experts.
In 2019, over 700 portfolio company executives attended 16
forums hosted by Hg covering topics such as employee engagement,
neurodiversity, finance function excellence, product strategy,
women in leadership, sales and marketing, and data analytics to
name a few.
In 2020, we plan to host 60 portfolio engagements, in the form
of summits, forums and webinars, whilst also utilising broader
communications, such as podcasts.
Hive - Hg's online community for everyday collaboration
To enable the continued collaboration across the portfolio, Hg
launched 'Hive', its online trusted environment, in 2018. With 23
live communities and over 1500 members, peer -- to -- peer
collaboration is unparalleled. Individuals are able to pose
questions, start discussions, share and collaborate on content, and
have access to best practice methodologies from world -- class
experts. This is a clear differentiator in the market.
>90%
members are from our portfolio companies
23
live communities
>1500
active members and growing!
For further information, please visit hive.hgcapital.com
Our team
c.200
members of the team
3
Investment offices in London, Munich and New York
Hg succeeds through the analysis and understanding of new and
emerging dynamics in the clusters in which it invests. This
requires profound knowledge of technology, markets and business
practices. To this end, we employ diverse and exceptionally
talented teams to identify and execute investment opportunities and
accelerate value creation during our ownership.
This specialisation - both in investment selection and portfolio
management - requires significant resources and we have built a
business employing close to 200 people, including nearly 120
investment and portfolio management executives, and other
professionals.
Our investment and portfolio executives come from a range of
backgrounds and experience including private equity, consulting,
investment banking, accounting and industry specialists. Our
Portfolio Team is comprised of a mix of senior operators and
functional specialists, who typically have many years of experience
in their respective specialist operational and strategic roles.
Investing primarily in European businesses, many of which have a
global footprint, requires time and a deep understanding of local
cultures. Accordingly, our people come from around the globe,
including sixteen European countries and the USA. Our Partners
have, on average, fifteen years' experience in the management of
private businesses.
Positioning ourselves as a best-in-class recruiter
Hg's recruitment and selection processes are rigorous and agile
which, along with our strong brand, leadership, sector focus, fund
performance and vibrant culture, allows us to attract and hire the
best talent in our industry.
Improving our ability to identify talent
We have enhanced our talent processes so that we can identify
and accelerate the development of our top performers and high
potential talent within the business. We believe that this is the
basis of effective career and succession planning.
Employee engagement
Our people are highly motivated by, and committed to, delivering
outstanding value to HGT, our other institutional clients, and our
portfolio company leadership teams. They are engaged by their work,
our values and the opportunity to grow to their full potential
within Hg.
Our values have evolved over many years and are embodied in our
working culture; these are aligned with our performance and reward
structures.
Hg works hard to ensure our employees are engaged. We use
independent external benchmarks to gauge levels of engagement and
take appropriate actions to ensure the highest possible levels of
engagement.
We have a strong focus on career and personal development and
provide a range of development opportunities to enable our talent
to reach their full potential and perform at their best.
Developing future leaders
We are explicit about the behaviours we wish to encourage at Hg
and have aligned recruitment, training, coaching, performance and
rewards to our values - for everybody across the organisation,
including our leadership.
A description of Hg's key staff is available at
www.hgcapital.com/meet-us/
______________________________________________________________________________________________________
"By continuing to invest in our people and our expertise, we are
able to work with the best management teams in our target clusters
and actively help them to build great businesses"
Steven Batchelor, Chief Operating Officer, Hg
______________________________________________________________________________________________________
Diversity and inclusion
Hg has introduced a number of new policies in the last twelve
months as part of a wider initiative around Diversity and
Inclusion.
In line with this wider initiative, Hg is forming its first ever
Diversity and Inclusion Steering Group, made up of representatives
from across the firm. The Steering Group aims to promote a culture
of inclusion that clearly values diversity in all its forms,
including a number of global initiatives around gender balance,
flexible working, mentoring programmes, training and awareness
events.
Level 20
Hg will maintain its commitment to industry-wide initiatives
such as Level 20, a not for profit organisation aligned around a
common vision to inspire more women to join the industry. In 2019,
Hg Senior Partner, Nic Humphries, joined Level 20's Advisory
Council.
______________________________________________________________________________________________________
" At Hg we aim to attract and maintain a team of the best
possible investment and operational talent. To do this we need to
ensure that we're building this team from the broadest range of
potential employees.
Having a clear strategy and committed team looking at Diversity
and Inclusion, with full support from the firm's senior leadership
team, is crucial. "
Martina Sanow, Deputy Chief Operating Officer, Hg
______________________________________________________________________________________________________
Responsible investing
Growing sustainable businesses which are great employers, have a
low environmental impact and are good corporate citizens
Why responsible investing is important to us
For Hg, Responsible Investment ('RI') means growing sustainable
businesses which are great employers, have a low environmental
impact and are good corporate citizens, whilst generating superior
risk adjusted returns for the millions of pensioners and savers
globally whose funds are invested with Hg.
We want the businesses we invest in to be genuinely focused on
doing well for all stakeholders including employees, customers,
suppliers, shareholders and the wider society. We firmly believe
that responsible business practices help generate superior long --
term performance.
Our responsible investing journey
2019 was a year of strong continued progress for Hg.
We set ourselves the vision to be the most sustainable private
equity firm in Europe and we were proud to achieve the top score,
AA++ from The United Nations-supported Principles for Responsible
Investment (UNPRI).
All portfolio companies assessed for their ESG values and
policies in 2018 were reassessed in 2019 and we are pleased to
report that there have been some significant improvements in
performance. We have also enhanced our ESG reporting capabilities
by implementing our assessment into our financial reporting system,
iLevel to give a holistic view of each business's
sustainability.
Whilst 2018 saw a complete review, refresh and relaunch of Hg's
Responsible Investment strategy, resulting in our brand new
Sustainable Business framework, 2019 was a year of embedding this
into business as usual and advancing to Sustainable Strategy
2.0.
Our Board approved Strategy includes:
-- Understanding the climate change risks associated with our
portfolio, as well as the impact we have as a firm - We have worked
with PwC to conduct a Climate Change risk assessment across our
portfolio.
-- Becoming Carbon Neutral - Our 2019 Carbon Footprint report,
see below ( or page 34 in the full Annual Report and Accounts) ,
shows Hg's value chain carbon footprint and what we have done to
offset our emissions and become Carbon Neutral.
-- Charitable Giving - Hg is a longstanding supporter of many
charities and we have recognised that we can do more to have a
positive impact on society. We are therefore exploring options to
focus specifically on technology and education for the less
privileged and expect to roll out these exciting initiatives during
the course of 2020.
ESG in the deal process
ESG is embedded into the entire deal process, from screening to
exit. As a first step, we are very clear on the types of businesses
we do not invest in, which is outlined in our exclusion list.
During due diligence, we assess companies for compliance with
relevant laws in relation to environmental, social, governance,
health and safety, bribery and corruption issues.
We also consider the inherent ESG risk of the company and carry
out an associated ESG review detailing risks and opportunities in
relation to our Responsible Business framework (see below or page
33 in the full Annual Report and Accounts).
We take an active approach to managing ESG during our ownership.
This starts with a Responsible Business onboarding and maturity
assessment within the first months of acquisition to identify areas
for improvement where Hg can support the companies to realise their
ambitions within and beyond our Responsible Business framework.
As part of our on-going engagement on Responsible Business, each
business is re-assessed on an annual basis and we follow up to
ensure appropriate actions are taken to improve as required.
Face-to-face forums helps our management teams to network, share
best practice and receive support (see below or page 29 in the full
Annual Report and Accounts).
PRI
A signatory to the UNPRI since 2012.
AA++ 2019 PRI Assessment Score:
'A+' for Strategy & Governance, and
'A+' for Private Equity Ownership
Our Responsible Business framework
Hg's Responsible Business framework outlines key ESG areas of
focus for software and service companies.
The framework is based on extensive research and forms the
foundation for the ESG assessments we conduct of our businesses as
part of onboarding and annually thereafter.
Essentials
There are certain minimum ESG requirements that Hg expects from
all our businesses. These include:
-- Governance and Business Integrity , such as a company code of
conduct, appropriate controls, board composition and appropriate
health & safety and grievance procedures.
-- Legal, Compliance and Risk , including compliance with all
laws and regulations, active risk management, as well as standards
and policies to combat bribery, corruption, money laundering,
anticompetitive behaviour and other malpractice.
-- Data and Cyber security , which includes Hg's minimum
standards for cyber security along with appropriate information
protection practices and GDPR compliance.
Employees
One of the most important assets of our businesses are the
employees. A diverse workplace with engaged and motivated staff is
vital for growth and business success. We look at employees from
four aspects:
-- Purpose and culture , including company vision, mission and
values.
-- Grow businesses and talent , including job growth, healthy
staff turnover, talent management and succession planning.
-- Engagement and motivation by promoting transparent
communications, health and wellbeing, learning opportunities,
recognition and good leadership.
-- Diversity of talent and equal opportunities irrespective of
ethnicity, gender, disability and background.
Society
We want all our businesses to strive for positive external
impact by acting transparently and contributing to society through
their business practices, charitable and community support and
external relations. Our businesses impact society in a number of
ways:
-- Community engagement including apprenticeships, charitable
giving and volunteering.
-- Environmental impact , such as energy use, carbon footprints,
data centre efficiency and waste management.
-- Positive relationship s with key external stakeholders
including customers and suppliers.
-- Transparency of company commitments and progress, including
external reporting and sustainability communications.
For more information please go to
www.hgcapital.com/responsibility
To watch our Responsible Investing video, please go to
hgcapital.com/responsibility
Certified Carbon Neutral Company
CarbonNeutral.com
Hg recognises the impact climate change has on the environment
and society.
By measuring and offsetting our carbon footprint, Hg aims to do
its part in tackling global climate change whilst supporting
sustainable development in local communities.
We strive to lead by example and are actively working with our
portfolio companies to raise awareness on climate change.
The issue
As long ago as 1994, the United Nations Framework Convention on
Climate Change recognised that the climate system can be affected
by GHG emissions and ozone depleting substances (ODS). The
consumption of fossil fuels, other industrial activities and
deforestation generate the majority of GHGs, such as carbon
dioxide, nitrous oxide, methane, chlorofluorocarbons (CFC),
hydrochlorofluorocarbons (HCFC) and hydrofluorocarbons (HFC). These
gases are collectively known as "greenhouse" gases since they do
not interact with short wave radiation from the sun, instead they
absorb the reflected long wave radiation from the earth's surface
and re-radiate this energy within the earth's atmosphere as
heat.
Methodology
This report outlines Hg's carbon footprint for the financial
year 2018-19, which has been prepared by an external consultant,
Natural Capital Partners, and includes our scope 1, 2 and 3
emissions: scope 1 accounts for the direct emissions from a
company's operations; scope 2, the indirect emissions from a
company's energy usage; and scope 3, any other indirect
emission.
Hg's carbon footprint was quantified by reviewing all Hg
premises' and employees' activity data in line with the GHG
Protocol standard and applying the most relevant emission factors
sourced from DEFRA's 2018 UK GHG Conversion Factors2 for Company
Reporting. The emission sources included in Hg's 2018-19 report
are:
Premises:
Mains gas and electricity consumption, transmission and
distribution losses, water consumption, wastewater leaving the
premises for treatment, as well as waste.
Business Travel:
Air travel including short- and long-haul flights. Rail
including domestic journeys and Eurostar. Other forms of travel
include taxi, as well as hotel stays.
Other:
Staff commuting including by car, rail, underground and taxi, as
well as courier deliveries.
Offset and reduction
Hg offsets all carbon emissions by supporting the Acre Amazonian
Rainforest project, which prevents deforestation and promotes
sustainable economic livelihoods in the Brazilian Amazon1. With
funds raised through carbon finance, the project is able to work
with local communities to create models of economic development
which avoid deforestation and protect the ecosystem. The project
delivers four of the 17 Sustainable Development Goals:
Hg is a certified Carbon Neutral company, committing to zero
emissions by offsetting our entire carbon footprint. We recognise
that offsetting is one way to reduce our environmental impact. In
addition, we are committed to understanding ways in which we can
reduce our overall footprint and investigating options around
procuring renewable energy.
(1)
https://www.naturalcapitalpartners.com/projects/project/acre-amazonian-rainforest-conservation
(2)
https://www.gov.uk/government/publications/greenhouse-gas-reporting-conversion-factors-2018
ESG case study: Transporeon value-chain
How creating a network effect using cloud technology platforms
is reducing global carbon emissions
Overview
Hg is a strong advocate for how cloud technologies can
significantly drive efficiencies within companies and across
sectors. More efficient businesses mean lower levels of waste,
which in turn is more sustainable.
In 2019, Hg invested in Transporeon, a cloud-based logistics
platform, connecting over 1,200 shippers and c.90,000 carriers
world-wide. Transporeon uses cloud technology to link all parties
in the transport logistics supply chain to transport logistics
platforms.
By creating a strong network effect through digitalisation,
collaboration and big data, Transporeon enables more efficient
sourcing, communication, collaboration and transactions in the
logistics industry, which in turn helps to lower carbon emissions
through a reduced number of empty cargo trucks (backhauls), reduced
truck waiting times, as well as CO2 monitoring systems.
Overall, Transporeon helps to solve five key inefficiency
challenges in the transport logistics sector:
1 Improving communication and transparency: easier, faster and
integrated communication between carriers and shippers improves
what has typically been a highly inefficient sector.
2 Reducing empty cargo trucks (backhauls): c.30% of trucks on
the road today are empty. This contributes to unnecessary traffic
congestion and CO2 emissions. By better linking up shippers and
carriers, Transporeon's platform is helping to reduce empty mileage
for carriers by up to 13%.
3 Reducing truck waiting times: Up to 90 minutes are wasted per
truck when waiting to load or unload goods. Transporeon helps
carriers to reduce truck waiting times by up to 30% and also to
improve turnaround times by up to 20% through digitised appointment
scheduling, security optimisation, enhancement of staff schedules
and controlled inbound and outbound flow.
4 Manual processes: Phone calls, emails, faxes and manual
paperwork are still commonly used in the freight industry.
Transporeon helps carriers automate and replace manual systems,
reducing the use of paper and cutting process costs up to 30%.
5 Helping carriers to calculate and monitor their carbon
footprint: Transporeon also helps its clients to calculate the
carbon footprint associated with transportation, adopting a
standardised calculation method which is fully compliant to CEN EN
16258 standard. The calculated carbon footprint is directly
displayed in the transport order - enabling clients to monitor and
subsequently manage their carbon footprint.
Advanced Automation
AI and its application in the world of Tax & Accounting
The growth of enterprise resource planning (ERP), tax and
compliance software has historically been driven by a requirement
to help move businesses away from paper-based processes, to
software-led workflows.
Hg has seen this evolution first hand, investing in this global
growth story across the last two decades. This growth has been
rapid and consistent, with thousands of small and medium-sized
enterprises (SMEs) across the world now operating more efficiently,
after digitising previously onerous processes.
Today we see demand for these services as showing further
structural growth, whilst innovation in software and technology is
certainly not standing still - so what's the next big theme?
Hg sees the application of artificial intelligence (AI) having a
significant impact on the evolution of the Tax & Accounting
universe over the next few years - and we're already seeing
continuing development of this technology across the businesses we
partner with.
Advanced Automation and AI
As a specialist software and technology investor, Hg is seeing
applications of AI filtering into many of the sectors that we
operate in. However, despite being well-covered, AI remains
ill-defined.
The early AI 'revolution' was epitomised when computer
scientists created a programme that could consistently beat a
reigning world chess champion in a six-game match - but few people
recognise this as AI today. Add into the mix 'Machine Learning', a
subset of AI applications which is often used interchangeably with
AI, the confusion grows.
We prefer the concept of 'Advanced Automation', especially in
relation to the Tax & Accounting universe. For us, this covers
the high levels of software automation that we're seeing in this
sector, typically enabled by computing techniques from the field of
AI.
This is rapidly making its way into core Tax & Accounting
applications, resulting in a giant leap in productivity for its
users.
Augmentation, not substitution
Despite a proliferation of start-ups and unicorns within this
field, we're not seeing many standalone products conquering the
space. Instead we're seeing AI applications that augment existing
products.
Look at how AI innovation is improving the quality of core
applications in other fields of tech, like Google Maps and Gmail,
rather than creating new, separate products under an 'AI' brand.
Similarly, in a Tax & Accounting context, we do not foresee
many new products arising. Rather, we expect a wave of product
augmentations to come forth, primarily powered by Advanced
Automation.
hgcapital.com/insight/advanced-automation-ai-and-its-application-in-the-world-of-tax-accounting/
______________________________________________________________________________________________________
"We believe firms can transform their practice by unlocking
client and practice data to deliver advisory-based services, and
generate more business opportunities to empower accountants to
thrive in the digital accountancy economy."
Elona Mortimer-Zhika, Chief Executive Officer, IRIS Software
Group
______________________________________________________________________________________________________
"Today, over 200,000 Visma customers are using a product that
applies machine learning. All of these products have a common aim -
to solve problems faced by our customers."
Jostein HÃ¥valdsrud, R&D Director for Visma Software
______________________________________________________________________________________________________
The Development of Advanced Automation
Like the prior evolution in Tax & Accounting software, we
expect Advanced Automation to continue to make bookkeepers and
accountants more productive at their work: those who do will become
the most competitive in their field. Then, as these products
strengthen and become part of a core offering, demand will grow -
gradually moving from a 'nice-to-have' feature to a 'need-to-have'
service from software vendors. We can already see this happening
and it will only become more pronounced over the next few
years.
As a result, for the vendors of this software, Advanced
Automation products and services are likely to become a 'hygiene
factor' - they will need to have this offering in order to remain
shortlisted by their buyers. It is therefore vital that these
businesses are developing this technology now - ahead, rather than
behind, the curve - in order to remain competitive.
The future of Advanced Automation
It is said that 'necessity is the mother of invention' and we
can certainly see how this applies to AI. The volume of underlying
ERP data alone is approximately doubling every 18 months. As this
increases, the human ability to process data meaningfully, without
proper data processing software tools, is significantly reduced,
even for the best accountants and managers.
For Hg, this ever-growing complexity in the audit process,
alongside the great strides of innovations we are currently seeing
in the market, gives us confidence that there will be a new wave of
Advanced Automation developed to meet this demand, drive change and
generate material value in millions of businesses globally.
Hg's investment in Tax & Accounting
Hg is a sector expert investor, committed to helping build
ambitious businesses across the technology and services market in
Europe and the US.
Hg's Team of 120 investment and portfolio management
professionals is the largest and most experienced in Europe. These
deeply resourced sector teams focus on specific sub-sectors and
investment themes to identify companies which have the potential to
grow, create employment and become leaders in their space.
Hg made its first investment in the tax and regulatory
compliance software market in 2004. Since then, Hg has invested in
over 11 platform companies and more than 200 acquisitions - we
currently own businesses worth over $10 billion in this sector,
including IRIS, Visma and Sovos.
This clustered investment strategy gives us unique insights and
experience which benefit the companies we back, their customers and
their employees.
AI case studies across the Hg portfolio
Hg is currently partnered with a number of large players in this
space and we can see strong progress being made in developing these
capabilities. There are three main themes: improving customer
productivity, improving customer service and combating accounting
errors and/or accountancy fraud.
1 Customer Productivity
Visma, an industry champion in Nordic and Benelux ERP, with
>8,500 employees and >900,000 customers, has adopted AI into
many of its core products, with the aim of continually reducing
costs through further automation of internal processes, whilst also
improving the customer experience.
They have c. 200 developers working full time on automation
projects, for example, 'Visma Scanner', which reads customer
receipts almost instantly, inputting key details into an
expense-management system. 'AutoInvoice' is an electronic invoicing
tool which currently serves >100,000 users in real time,
business-to-government reporting, helping to save 'people-hours' by
automating Accounts Payable / Accounts Receivable functions.
TeamSystem is a leading provider of business-critical,
regulatory driven software products to c. 250,000 accountants, HR
professionals and SMEs in Italy. It is also developing automated
scanning and document recognition services for its customers,
combining classic optical character recognition (OCR) with modern
machine learning practices to create a product with around 75%
accuracy which improves day by day - saving significant time for
customers and increasing productivity.
Tommaso Cohen, CFO and Strategy Executive Director at
TeamSystem, said:
"Our core strategy includes investing heavily in R&D to
support the constant improvement and growth of our products and
services. A key part of this is technology, which we look to evolve
in order to improve the productivity and experience of our
customers. Machine learning plays a big role in some of our latest
projects and development of this technology is vital to stay
competitive in this space."
2 Customer Service
Visma has also built an engine which, with 95% accuracy, can
automatically distribute customer support tickets to the correct
customer support team, based on message content - saving
significant time and therefore better servicing customer enquiries.
Third-party chat bots have also been developed to provide customers
with further assistance, reducing the need for internal support by
around 20%.
TeamSystem have invested in chat bot technology to help improve
customer service as well. The service is being developed to improve
and learn, supporting TeamSystem's accounting customers,
facilitating the exchanging of documents in a safe environment and
generally providing additional support.
Jostein HÃ¥valdsrud, R&D Director for Visma Software,
said:
"Most software is equal to all users, unless customised. Machine
learning is one way of achieving this. It can be used to analyse
patterns of usage, then predict the next step of users, and also
guide them. At Visma, we're using machine learning heavily in
chat-bot services and we are testing out speech-recognition to
interact with our software. Machine learning can also be used to
eliminate manual work related to input of data. Today, over 200,000
Visma customers are using a product that applies this technology.
All of these products have a common aim - to solve problems faced
by our customers."
3 Checking for Data Anomalies
IRIS is a leading provider of critical software solutions for
Tax & Accounting in the UK, serving more than 20,000
accountancy practices.
In 2018, it launched 'IRIS AI', a family of products and
services for its customers. The first product in this offering, 'Ai
Auditor(TM)', was developed by MindBridge Ai. It scans the entirety
of a client's general ledger for any potential errors using a
hybrid of machine learning and AI techniques, vastly improving on
legacy/manual spot checks, and is saving SME businesses from
administrative errors.
It is also proving effective at checking for fraud, giving
accountants a further layer of comfort that no fraudulent behaviour
has taken place.
Elona Mortimer-Zhika, CEO at IRIS Software Group, said:
"AI is generating a lot of interest among accounting and finance
professionals and there is an appetite to reduce repetitive,
time-consuming and redundant tasks to free up capacity for more
lucrative, added-value consultancy for clients.
We believe firms can transform their practice by unlocking
client and practice data to deliver advisory-based services, and
generate more business opportunities to empower accountants to
thrive in the digital accountancy economy. Our relationship with
MindBridge Ai in bringing Ai Auditor to the UK market is a big
stride in this direction."
Year in review
A high quality and focused portfolio of investments delivered a
strong year of performance for HGT, driven primarily by robust
trading across Hg's unrealised investments.
Top 20 investments:
(92% of the portfolio value)
______________________________________________________________________________________________________
+24%
Top 20 LTM sales growth
______________________________________________________________________________________________________
+35%
Top 20 LTM EBITDA growth
______________________________________________________________________________________________________
On an aggregated basis, the Hg portfolio would represent the
fourth largest, and fastest growing, software business in
Europe.
______________________________________________________________________________________________________
Net asset value (NAV)
During the year, the NAV of HGT increased by GBP234 million,
from GBP805 million at 31 December 2018 to GBP1,039 million at 31
December 2019.
Attribution analysis of movements in Revenue Capital Total
NAV GBP'000 GBP'000 GBP'000
------------------------------------------------ ---------- ----------- -----------
Opening NAV as at 1 January 2019 30,554 774,433 804,987
Realised capital and income proceeds
from investment portfolio
in excess of 31 December 2018 book value 1,082 24,928 26,010
Net unrealised capital and income appreciation
of investment portfolio 28,143 155,471 183,614
Net realised and unrealised gains and
income from liquid resources 1,834 897 2,731
Share issue - 75,261 75,261
Dividend paid (18,444) - (18,444)
Expenditure (4,043) (2,621) (6,664)
Taxation (80) - (80)
Investment management costs:
Priority profit share - current year
paid (10,831) - (10,831)
Priority profit share - reallocation
between capital and income (4,679) 4,679 -
Carried interest - current year paid - (1,511) (1,511)
Carried interest - current year provision - (15,775) (15,775)
------------------------------------------------ ---------- ----------- -----------
Closing NAV as at 31 December 2019 23,536 1,015,762 1,039,298
------------------------------------------------ ---------- ----------- -----------
Analysis of NAV movements
A number of underlying factors contributed to the increase in
NAV. Positive impacts were the GBP183.6 million revaluation of the
unquoted portfolio and uplifts of GBP26.0 million on the
realisation of investments compared with their carrying value at
the start of the year. Shares issued during the year contributed a
further GBP75.3 million. Reductions in NAV included: the payment of
GBP18.4 million of dividends to shareholders and Hg's remuneration
(GBP12.3 million and GBP15.7 million increase in the provision for
future carried interest).
Realised and unrealised movements in the value of investments
Investment name and ranking by value GBP'million
at 31 December 2019
------------------------------------------------ ---------------
Visma (1) 50.4
Access (4) 21.6
Sovos Compliance (2) 19.2
IRIS (3) 18.7
Foundry (sold) 12.5
Register (sold) 11.8
P&I (13) 11.4
Other 9.8
Citation (11) 8.9
FE fundinfo (16) 8.0
CogitalGroup (6) 7.3
Litera (7) 5.6
Commify (17) 5.1
Mobility Holding (8) 5.0
Allocate (14) 5.0
TeamSystem (18) 4.5
IT Relation (12) 4.1
A-Plan Group (15) 3.0
Evaluate (23) 2.2
Achilles (24) (4.5)
------------------------------------------------ ---------------
Analysis of movements in the value of investments
During the year, the value of the unrealised investments
increased by GBP183.6 million, before the provision for carried
interest. The majority of the increase (GBP205.5 million) relates
to increases from profit growth in the underlying investments and
GBP63.2 million from increased valuation multiples.
Acquisitions net of realisations at carrying value added GBP25.2
million. An increase in net debt of GBP58.3 million and GBP27.4
million of adverse currency movements contributed negatively to the
unrealised portfolio.
Top 20 portfolio trading performance as at 31 December 2019
The top 20 investments (representing 92% of total investments by
value) have delivered strong sales growth of 24% and EBITDA growth
of 35% over the last twelve months ('LTM') the latter being an
acceleration from the growth levels reported in December 2018.
The business model characteristics of the companies we are
invested in give us confidence that double-digit growth can be
achieved consistently going forward.
More than 75% by value of the top 20 businesses within the
portfolio are seeing double-digit revenue growth, and more than 85%
have delivered double-digit EBITDA growth over the last twelve
months.
Profits have grown at a faster rate than revenues with
investment made into the cost base of a number of companies, for
example, to finance increased sales and marketing capabilities,
strengthen management and new product development, continuing to
bear fruit.
We have seen very robust and consistent trading performance from
the majority of the portfolio with particularly strong growth from
P&I, Access, Visma and Commify in the technology sector and
from CogitalGroup and Citation in the services sector. Whilst new
to the portfolio, Litera, Transporeon and team.blue have had a good
start to their partnership with Hg.
Where a company has not performed as well as we would like, we
have reflected this in their valuation. During 2019, we took the
decision to write down Achilles, whose operational performance had
been below expectations; however we believe we can see a path to
recovery here.
Overall, continued robust earnings growth and strong cash
generation continue to drive equity value in our investments.
Distribution of top 20 LTM sales growth: +24%
Number of investments % of top 20 portfolio
LTM Sales within associated by value within
Growth rates GBP' million band associated band
------------------ -------------- ---------------------- ----------------------
<0% p.a. 82 1 3%
0% to <10% p.a. 1,110 7 20%
10% to <20% p.a. 602 6 32%
>20% p.a. 2,191 6 45%
------------------ -------------- ---------------------- ----------------------
Distribution of top 20 LTM profit growth: +35%
Number of investments % of top 20 portfolio
LTM EBITDA within associated by value within
Growth rates GBP' million band associated band
------------------ -------------- ---------------------- ----------------------
<0% p.a. 31 1 3%
0% to <10% p.a. 86 3 9%
10% to <20% p.a. 345 6 32%
>20% p.a. 705 10 56%
------------------ -------------- ---------------------- ----------------------
Valuation and net debt analysis as at 31 December 2019
Our valuation policy is applied consistently, in accordance with
the IPEV Valuation Guidelines. Each company has been valued
individually, based on the trading multiples of comparable
businesses and relevant and recent M&A activity; this resulted
in an average EBITDA multiple for the top 20 investments of 19.8x
(19.5x at 30 June 2019).
There remains a continued shift in the mix of the portfolio to
higher growth businesses, in particular in the software sector,
where we hold a number of companies with substantial opportunities
to grow their Software as a Service ('SaaS') business.
We continue to take a considered approach in determining the
level of maintainable earnings to use in each valuation, in line
with the IPEV Valuation Guidelines. Most holdings have been valued
using the LTM earnings to 30 November 2019, unless we have
anticipated that the outlook for the full current financial year is
likely to be lower, in which case we have used forecast earnings.
The earnings figure used may be adjusted on a pro-forma basis
reflecting any acquisitions, disposals or other adjustments to the
extent a buyer would make such adjustments. In selecting an
appropriate multiple to apply to a company's earnings, we look at a
basket of comparable companies, primarily from the quoted sector,
but also making use of M&A data. We also use back testing to
understand substantive differences that legitimately occur between
an exit price and the previous fair value assessment to inform our
valuation policy.
Our companies make appropriate use of gearing, with a weighted
average net debt for the top 20 of 6.2x LTM EBITDA (6.3x at 30 June
2019). Many of our businesses have highly predictable, strong
earnings growth and are very cash generative, enabling us to use
debt to reduce their cost of capital and improve returns on the
equity we hold.
Distribution of top 20 EV to EBITDA valuation multiples: 19.8x
% of top 20
portfolio by
Number of investments value within
EBITDA within associated associated
EV to EBITDA bands GBP' million band band
-------------------- -------------- ---------------------- --------------
<15.0x 260 6 17%
15.0x to <18.0x 103 4 12%
18.0x to <21.0x 221 4 17%
21.0x to <24.0x 523 4 46%
>24.0x 93 2 8%
-------------------- -------------- ---------------------- --------------
Distribution of top 20 net debt to EBITDA ratios: 6.2x
% of top 20
portfolio by
Number of investments value within
Debt within associated associated
Debt to EBITDA bands GBP' million band band
---------------------- -------------- ---------------------- --------------
<4.0x 239 2 4%
4.0x to <6.0x 2,535 6 40%
6.0x to <7.0x 1,803 6 21%
7.0x to <8.0x 1,245 4 20%
>8.0x 1,621 2 15%
---------------------- -------------- ---------------------- --------------
Outstanding commitments of HGT
At the end of 2019, HGT held liquid resources of GBP189 million,
supported by an undrawn bank facility of GBP80 million. Outstanding
commitments as at 31 December 2019 were GBP336 million, as listed
below. We anticipate that the majority of these outstanding
commitments will be drawn down progressively over the next year and
are likely to be partly financed by cash flows from future
realisations. Future commitments are likely to be drawn down over a
period of four to five years (2020 - 2025). Additionally, to
mitigate the risk of being unable to fund any draw -- down under
its commitments to invest alongside Hg's funds, the Board has
negotiated a right to opt out, without penalty, of HGT's obligation
to fund such commitments where it does not have the funds to do so
or certain other conditions exist.
Fund Fund Original Outstanding commitments Outstanding commitments
vintage commitment as at 31 December as at 31 December
GBP'million 2019 2018
----------------------------- ---------- -------------
GBP'million % of NAV GBP'million % of NAV
----------------------------- ---------- ------------- -------------- ---------- -------------- ----------
Hg Genesis 8 2018 350.0 143.5 13.8% 247.9 30.8%
---------- ------------- -------------- ---------- -------------- ----------
Hg Saturn 2018 150.0 69.3 6.7% 92.4 11.5%
---------- ------------- -------------- ---------- -------------- ----------
Transition Capital 2018 75.0 59.1 5.7% 59.5 7.4%
---------- ------------- -------------- ---------- -------------- ----------
Hg Mercury 2 2017 80.0 36.7 3.5% 49.8 6.2%
---------- ------------- -------------- ---------- -------------- ----------
Hg Genesis 7 2013 200.0 20.0 1.9% 5.5 0.7%
---------- ------------- -------------- ---------- -------------- ----------
Hg Mercury 1 2011 60.0 3.3 0.3% 3.2 0.4%
---------- ------------- -------------- ---------- -------------- ----------
Hg Genesis 6 2009 285.0 2.4 0.3% 3.8 0.5%
---------- ------------- -------------- ---------- -------------- ----------
Pre-Hg Genesis 6
vintage pre-2009 120.0(1) 1.3 0.1% 1.3 0.2%
---------- ------------- -------------- ---------- -------------- ----------
Asper RPP I 2006 18.3(2) 0.6 0.1% 0.7 -
---------- ------------- -------------- ---------- -------------- ----------
Hg6E 2009 15.0(3) 0.1 - 0.2 -
---------- ------------- -------------- ---------- -------------- ----------
Asper RPP II 2010 33.9(4) - - 6.5 0.8%
----------------------------- ---------- ------------- -------------- ---------- -------------- ----------
Total 336.3 32.4% 470.8 58.5%
----------------------------------------- ------------- -------------- ---------- -------------- ----------
Liquid resources(5) 189.3 18.2% 156.5 19.4%
----------------------------------------- ------------- -------------- ---------- -------------- ----------
Net outstanding commitments
unfunded by liquid
resources 147.0 14.2% 314.3 39.1%
----------------------------------------- ------------- -------------- ---------- -------------- ----------
(1) Excluding any co -- investment participations made through HGT
LP.
(2) Sterling equivalent of EUR21.6 million.
(3) Partnership interest acquired during 2011.
(4) Sterling equivalent of EUR40.0 million.
(5) Excludes undrawn bank standby facility
Investment portfolio of HGT
Residual
cost Total valuation(1) Value
Fund limited partnerships GBP'000 GBP'000 %
------------------------------------------------ --------- ------------------- -------
Primary buyout funds:
HGT 7 LP 98,705 269,620 32.0%
HGT 7 LP - Provision for carried interest - (43,916) (5.2%)
HGT 8 LP 185,066 233,140 27.6%
HGT LP 76,401 146,191 17.4%
HGT Saturn LP 78,678 120,892 14.4%
HgCapital Mercury D LP 17,335 45,314 5.4%
HgCapital Mercury D LP - Provision for carried
interest - (9,110) (1.1%)
HGT Mercury 2 LP 26,076 41,560 4.9%
HGT 6 LP 14,861 24,099 2.9%
HGT 6 LP - Provision for carried interest - (4,818) (0.6%)
------------------------------------------------ --------- ------------------- -------
Total primary buyout funds 497,122 822,972 97.7%
------------------------------------------------ --------- ------------------- -------
Secondary buyout funds:
HgCapital 6 E LP - 1,215 0.1%
HgCapital 6 E LP - Provision for carried - (243) -
interest
------------------------------------------------ --------- ------------------- -------
Total secondary buyout funds - 972 0.1%
------------------------------------------------ --------- ------------------- -------
Total buyout funds 497,122 823,944 97.8%
------------------------------------------------ --------- ------------------- -------
Transition capital funds:
HGT Transition Capital LP 14,852 16,527 2.0%
------------------------------------------------ --------- ------------------- -------
Total transition capital funds 14,852 16,527 2.0%
------------------------------------------------ --------- ------------------- -------
Renewable energy fund:
Asper RPP I 5,040 1,808 0.2%
------------------------------------------------ --------- ------------------- -------
Total investments net of carried interest
provision 517,014 842,279 100.0%
------------------------------------------------ --------- ------------------- -------
(1) Includes accrued income.
Portfolio diversification and performance
Hg cluster by value
49% Tax & Accounting
15% ERP & Payroll
12% Legal & Regulatory
8% SME Tech & Services
6% Healthcare IT
6% Automotive
2% Insurance
2% Capital Markets & Wealth Management IT
Geographic spread by value
31% UK
28% Scandinavia
18% North America
15% Germany
8% Other Europe
Investment vintage by value
13% 2019
28% 2018
9% 2017
20% 2016
3% 2015
27% pre 2015
Analysis by value of investment return relative to its original
cost(2)
97% Above
3% Below
(2) Representing aggregate realised proceeds and unrealised
valuations of an investment
Investments and realisations
Investments 2019
Over the course of the year, Hg invested a total of GBP1.4
billion on behalf of its clients, with HGT's share being GBP117
million.
The vast majority of our investments are generated by
establishing and developing relationships with companies over the
longer term and typically pursuing opportunities where we have a
strong relationship with a founder or management team. By doing
this, we believe that we can invest in the very best businesses
within our chosen clusters.
We continue to look for businesses that share similar underlying
business model characteristics, such as: high levels of recurring
revenues; a product or service that is business-critical but
typically low spend; low customer concentration; and low
sensitivity to market cycles. This is a theme that runs through
many of our new investments and we believe companies with these
characteristics will remain in high demand across market
cycles.
New investments
Transporeon
GBP42m invested on behalf of HGT, including GBP6m in
co-investment
In March, Hg completed an investment in Transporeon Group
('Transporeon'), one of the world's leading cloud -- based
logistics platforms, via the Hg Genesis 8 Fund.
Founded in 2000 and headquartered in Ulm, Germany, Transporeon
connects a global network of over 1,200 shippers and >90,000
carriers, enabling them to source, communicate, collaborate and
transact more efficiently, whilst also helping to lower CO2
emissions by reducing empty back-haul journeys. This investment
represents another example of Hg's focus on Cloud -- based software
and network companies, providing SaaS solutions to the business
community.
Litera
GBP34m invested on behalf of HGT
In May, Hg completed an investment in Litera. Based in Chicago,
New York and London, Litera provides a leading suite of legal
document productivity applications, delivered as an end-to-end
platform to more than 1,300 organisations across the globe.
This investment follows one of Hg's core investment theses,
focused on the secular growth of software suppliers for
business-critical functions in the legal and regulatory compliance
sector. Hg has been actively following this theme for over 15
years, with Litera representing the sixth legal and compliance
business currently in Hg's portfolio.
Hg's team has known Litera for several years, recognising it as
a business that solves mission-critical workflows for its
customers, leading to strong recurring revenues and displaying the
same growth characteristics as many others in the Hg portfolio.
team.blue
GBP25m invested on behalf of HGT
In March, Hg completed an investment in Combell Group, a mass
hosting provider offering web enablement solutions focused mainly
on the Belgium and Danish markets with a smaller presence in the
Netherlands, via the Hg Genesis 8 Fund, before supporting the
transformational acquisition of TransIP Group in June 2019, also
focused on the Netherlands. Finally, in September 2019, Register
Group was acquired (a Mercury 2 portfolio company) - focused on
growth markets in Southern Europe, Italy and Spain, as well the UK
and Ireland. Following these acquisitions, the combined group
rebranded as team.blue.
team.blue is a leading European provider of mass hosting
services to SMEs, primarily in North-Western Europe (Netherlands,
Belgium, Denmark, Ireland and UK) and Southern Europe (Italy and
Portugal) with a growing presence in Sweden, Switzerland and Spain.
The business has close to two million SME and small office/home
office customers and is a one-stop partner for web hosting,
domains, e-commerce and application solutions.
Further investments
Visma
GBP19m invested on behalf of HGT
In May and October, Hg made further investments in Visma, a
leading provider of mission -- critical business software to SMEs
in the Scandinavian region via the Hg Saturn Fund. In 2002, Hg
identified regulatory -- driven, subscription -- based software as
an attractive sub -- sector with scope for considerable growth over
the following decade and initially invested in Visma in 2006. Since
this time the business has consistently exceeded our investment
plans, having acquired more than 150 companies over our ownership
period to become one of today's leading and largest SaaS companies
in Europe, with more than GBP1 billion in cloud revenues.
Lyniate
GBP4m invested on behalf of HGT
In June and September, the Hg Mercury 2 Fund made further
bolt-on investments in Lyniate. Headquartered in Boston, USA,
Lyniate is a global leader in healthcare interoperability and data
liquidity solutions. Their software serves public and private
hospitals, health systems, Health Information Exchanges, OEM
vendors, public health departments and federal government
organisations.
New investment since the year-end
P&I
An estimated GBP35m invested on behalf of HGT including GBP5m in
co-investment
In December 2019, Hg announced an investment in Personal &
Informatik AG ('P&I'), a leading provider of cloud-based HR
software, headquartered in Germany. This acquisition, via the Hg
Saturn fund, valued the business at an enterprise value of EUR2
billion. The seller, Permira, will remain invested in P&I with
a substantial minority stake. This transaction is due to complete
in March 2020.
Argus
GBP35m invested on behalf of HGT including GBP4m in
co-investment
In January 2020, Hg completed an investment in Argus Media
('Argus'), a leading global provider of energy and commodity price
reporting via the Hg Saturn Fund.
Founded in 1970, Argus is an independent media organisation
headquartered in London. Companies in 140 countries around the
world use Argus data to index physical trade and as benchmarks in
financial derivative markets as well as for analysis and planning
purposes.
Interlad
GBP31m invested on behalf of HGT
In February 2020, Hg completed an investment in Intelerad
Medical Systems ('Intelerad'), a leading global provider of medical
imaging software and enterprise workflow solutions, via the Hg
Genesis 8 Fund.
Founded in 1999, Intelerad specialises in diagnostic viewing,
reporting and collaboration solutions for radiologists.
Headquartered in Montreal, the business has over 400 employees
located in offices in Canada, the US, the UK, and Australia. The
company serves over 300 healthcare organisations around the world,
including radiology groups, imaging centres, clinics and reading
groups with a strong and growing presence in hospital imaging
departments. Healthcare IT is a core sector for Hg, with an
investment focus on healthcare operations, core systems, life
sciences digitisation, interoperability and population health.
Intelerad represents the 5th healthcare technology investment in
Hg's current portfolio.
smartTrade
An estimated GBP17.5m invested on behalf of HGT including GBP10m
in co-investment
In February 2020, Hg announced an investment in smartTrade
Technologies ('smartTrade'), a leader in multi-asset electronic
trading solutions, via the Hg Mercury 2 fund. The transaction is
due to complete in March 2020.
Headquartered in France, smartTrade is a managed services and
hosted software provider for trading desks, enabling its global
client base of financial institutions to develop and run
high-performance trading platforms throughout the world. Hg has
been investing in Capital Markets & Wealth and Asset Management
technology for almost 20 years and has known the smartTrade team
since 2015. During this time Hg has recognised smartTrade as a
truly innovative business with an exceptional leadership team,
which has developed leading, modular solutions, used by sell-side
and buy-side market participants.
With continued potential for growth, smartTrade is a compelling
fit with Hg's expertise and capabilities.
Further investment since the year-end
Achilles
GBP10m invested on behalf of HGT
In January 2020, HGT made a further investment in Achilles,
structured as a debt instrument via the Transition Capital Fund.
This will be used to implement the roll-out of new technology which
will complete the migration of the business onto a new platform
"my.Achilles"
Further detail on investments as at 31 December 2019 can be
found on pages 54 to 75 in the full Annual Report and Accounts.
Realisations 2019
Over the course of the year, Hg has returned a total of GBP843
million to its clients, including GBP117 million to HGT.
Whilst exits over 2019 were slower in pace than over the very
active prior two years, we have continued to look at opportunities
to realise proceeds for our investors.
We have also taken advantage of buoyant debt markets during the
period by refinancing investments where we have good visibility of
their future earnings, returning cash proceeds to our clients,
including HGT, and we will continue to assess further
opportunities.
Exits
Foundry
GBP28m returned to HGT
In April, Hg completed the sale of Foundry, a UK headquartered
leading global developer of high-end visual effects ('VFX') and 3D
design software, to Roper Technologies Inc., a leading diversified
technology company. Hg invested in Foundry from the Hg Genesis 7
fund in 2015, recognising the company as a leading global provider
of vertical market application software, with rich intellectual
property, strong positioning within its business segments and with
the potential to enter new market segments. Over the course of the
investment, Hg worked with the company's management team to broaden
Foundry's go-to-market strategy, invest in its cutting-edge Media
& Entertainment product offering and accelerate the growth of
the company's Digital Design division.
The sale of Foundry delivered a 2.1x investment multiple and a
22% gross IRR over the investment period. This transaction resulted
in an uplift of 79% over the carrying value of the business at 31
December 2018.
Register
GBP17m returned to HGT
In September, team.blue (formerly Combell Group), a leading mass
hosting business in Belgium and Denmark, announced the acquisition
of Register (formerly DADA), a pan-European mass hosting company
headquartered in Italy. team.blue is the third largest shared
hosting business in Europe with more than 2 million customers
across 10 countries. HGT was already invested in team.blue; its
investment in team.blue increased as a result of this transaction
and was valued at GBP31 in total at year-end.
Partial exits
Asper
GBP11m returned to HGT
In September, HGT agreed the sale of the Asper RPP II Fund
interest to two strategic buyers, as part of a wider secondary sale
process. Additional consideration is deferred and due to HGT on the
first anniversary of the sale.
Raet
GBP10m returned to HGT
As reported in the 2018 full year accounts, last year Hg agreed
to the sale of Raet's operations to Visma. During the year, GBP10.3
million of deferred proceeds were received in respect of this
investment.
Visma
GBP3m returned to HGT
In February, Hg completed the part -- realisation of Visma, a
leading provider of business -- critical software to private and
public enterprises in the Scandinavian region, from the Hg Genesis
7 Fund, to the Canada Pension Plan Investment Board (CPPIB).
Following completion of this transaction,
Hg will remain the lead investor in Visma alongside some of the
world's largest institutional investors. Together, Visma and its
strong investor base will continue to reinforce Visma's position as
a leading SaaS business in Europe and one of the world's most
successful SaaS companies.
Refinancings
A-Plan Group
GBP14m returned to HGT
In March, the Genesis team will complete the refinancing of A --
Plan Group, a leading independent high -- street insurance broker
in the UK. A -- Plan Group has now returned 1.4x the original
investment made in April 2015 to the Hg Genesis 7 Fund.
Commify
GBP9m returned to HGT
In September, the Mercury team completed the refinancing of
Commify, a leading Application-to-Person messaging service in
Western Europe.
FE fundinfo
GBP6m returned to HGT
In December, the Hg Mercury team completed the refinancing of FE
fundinfo, the global fund data and analytics business, catering to
asset managers and fund distributors.
team.blue
GBP5m returned to HGT
In June, team.blue (formerly Combell Group), a mass hosting
provider offering web enablement solutions to SMEs across Europe,
headquartered in Belgium, merged with TransIP, a leading hosting
and Virtual Private Server ('VPS') provider based in the
Netherlands. Subsequently, Hg completed a refinancing of the
enlarged business, repaying a portion of Hg's original loan
notes.
Sovos Compliance
GBP2m returned to HGT
In April, Hg completed the refinancing of Sovos, a leading
global provider of tax compliance software solutions in Hg Genesis
7. This was driven by strong trading performance, which has seen
Sovos deliver robust double-digit compound growth in revenue and
EBITDA since acquisition.
EidosMedia
GBP1m returned to HGT
In September, the Hg Genesis team completed the refinancing of
EidosMedia, a leader in Enterprise Content Management software
serving media and Financial Services markets.
Exit since the year end
e-conomic
GBP2m returned to HGT
In January 2020, Hg realised its residual holding in e-conomic,
a leading European Software as a Service ('SaaS') accounting
solutions provider to SMEs based in Denmark.
Further detail on investments as at 31 December 2019 can be
found on pages 54 to 75 in the full Annual Report and Accounts.
To view our press releases, please visit
hgcapitaltrust.com/news-and-media/press-releases/pr-2019.aspx
Summary of investment and realisation activity
Investments made during the year
Company Cluster Location Activity Cost
GBP'000
Cloud-based logistics
Transporeon ERP & Payroll Germany platform 42,377
Legal & Regulatory Provider of legal document
Litera Compliance North America applications 34,242
European hosting services
team.blue SME Tech & Services Benelux for SMEs 24,814
---------------- ---------------------- -------------- ------------------------------ ----------
New investments 101,433
---------------------------------------------------------------------------------------- ----------
Tax & Accountancy/ERP Provider of business software
Visma & Payroll Scandinavia to SMEs 18,998
Software to the healthcare
Lyniate Healthcare IT North America sector 3,839
Other (6,986)(1)
---------------------------------------------------------------------------------------- ----------
Further investments 15,851
---------------------------------------- --------------------------------------------- ----------
Total investments on behalf
of HGT 117,284
---------------------------------------- --------------------------------------------- ----------
(1) Figure is negative due to a refinancing which is accounted for
as a reduction of original cost if completed with 18 months of original
acquisition.
Realisations made during the year
Company Sector Exit route Proceeds(2)
GBP'000
-------------------------------------- ------------------------------------ ---------------- ------------
Foundry SME Tech & Services Trade sale 28,227
Asper RPP II Renewables Secondary sale 19,745
Register SME Tech & Services Trade sale 16,518
------------------------------------- ------------------------------------- ---------------- ------------
Full realisations 64,490
---------------------------------------------------------------------------------------------- ------------
A -- Plan Group Insurance Refinancing 13,615
Raet ERP & Payroll Secondary sale 10,307
Commify SME Tech & Services Refinancing 9,185
Capital Markets & Wealth Management
FE fundinfo IT Refinancing 5,596
team.blue SME Tech & Services Partial sale 5,374
Other 9,481
---------------------------------------------------------------------------------------------- ------------
Partial realisations 53,558
-------------------------------------- ----------------------------------------------------- ------------
Total proceeds from realisations 118,048
-------------------------------------- ----------------------------------------------------- ------------
Carried interest paid to the
Manager (1,511)
-------------------------------------- ----------------------------------------------------- ------------
Total proceeds from realisations
received by HGT 116,537
-------------------------------------- ----------------------------------------------------- ------------
(2) Includes gross revenue received during the year ended 31 December
2019.
Hg's outlook
______________________________________________________________________________________________________
"In 2019, we have reinforced Hg's focus and scale. Focus on the
software and service universe and scale to ensure our reach,
expertise and network goes broader and deeper than ever before.
Today Hg looks less like a traditional private equity firm and
more like a fully collaborative, software and services
organisation. This is our vision for the future of private
equity."
Matthew Brockman, Managing Partner, Hg
______________________________________________________________________________________________________
Investments
We believe that the clarity and distinctive focus of our
strategy as a disciplined investor provides us with several clear
advantages, especially in the current high asset price market
environment. Specifically, we continue to concentrate on companies
that provide non -- discretionary, business -- critical products or
services, to fragmented customer bases, and which benefit from
strong contracted or recurring revenues. This focus on defensive
growth should enable us to identify opportunities that will
generate strong, risk adjusted returns for our clients across
market cycles.
We continue to see attractive investment opportunities in our
eight target 'clusters', and we continue to invest selectively,
capitalising on situations where we have a specific angle and have
built many years of knowledge of the business and its end-market
clusters, and developed strong relationships with the founders and
management teams.
Hg's clear investment focus, combined with our scale, large
investment team reach and network, produces more investment
opportunities than Hg would want to complete in any given year.
This means we are able to be highly discerning in the opportunities
we pursue. In 2019, just within our 8 target clusters, Hg declined
over 30 investment opportunities, while we made three new platform
investments; a further 25 situations remained under review at the
year end.
Across our fund stack we expect investment activity in 2020 to
continue broadly in line with our recent historic pacing. In 2020
we have already announced or closed investments in Argus Media,
P&I, Intelerad and smartTrade for the Saturn, Genesis and
Mercury funds.
As ever, bolt-ons and strategic M&A within the current
portfolio remain a key focus and across the current portfolio we
have multiple live M&A situations; MediFox, Access, Visma,
Mitratech, Sovos, and IT Relation have already signed meaningful
bolt-ons in 2020.
Realisations
Over 2020 we will continue to focus on opportunities to
crystallise value across our portfolio, and return money to our
clients, including HGT. We have several exit and refinancing
processes currently underway or specifically planned for 2020 and
we believe these will help drive the continued positive performance
of HGT.
Current risks
The Covid-19 situation continues to worsen. At this stage, we
expect the Coronavirus to have limited direct impact on Hg's
portfolio, given the defensive growth characteristics of the
portfolio, with a strong focus on protected business models selling
business-critical and non-discretionary software and services to
their underlying customers.
In the case of a significant spread of the virus to Europe,
again, we expect the direct impact on our businesses to be limited
versus other sectors (particularly consumer discretionary or travel
related) given the underlying nature of our long-term
subscription-revenue based B2B software platforms, although general
business sentiment will no doubt be affected. We will continue to
keep this situation under close review.
It seems highly likely that spread of Covid-19 will now lead to
meaningfully lower global growth in 2020, and potentially a global
recession. Given we are now 12 years into one of the longest
sustained periods of global growth on record, we have been
anticipating a recessionary environment for the last few years. We
believe our current investments are well positioned to continue to
create value on both an absolute and relative basis going forward,
even if macro-economic conditions deteriorate.
Whilst we are yet to see how the new relationship between the UK
and European Union will develop, we remain confident that the types
of businesses in which we invest will continue to perform well.
Long-term prospects
At Hg, we have never seen more opportunity to back great
software and tech-enabled service companies that are changing how
we all do business.
We continue to see the impact of positive trends driving
technology growth for the next 10 to 20 years, including:
-- the automation of routine tasks; Software used to save time
and improve accuracy in business processes;
-- the rise of software interconnectivity; through the use of
application program interfaces ('APIs') that let software talk to
software, thereby exponentially increasing the amount of usable
data available for businesses; and
-- increased desire from governments for regulatory visibility
on businesses (and citizens); in almost all B2B software there are
compliance and government tailwinds.
We believe our investment strategy works. The portfolio is in
good health overall and growing strongly. Trading over the last
twelve months has continued to generate average double-digit sales
and EBITDA growth of 24% and 35% respectively, across the top 20
businesses, and margins of 29%. This should create a store of
future value for the shareholders of HGT.
Overview of the underlying investments
held through HGT's limited partnerships
Investments Year Residual Total Cum.
(in order of Fund Cluster Location of cost Valuation(1) Value value
value) investment GBP'000 GBP'000 % %
---------------- --------------- -------------------- ----------- ---------- -------- ------------ ------ -----
Tax &
HGT 7/HGT/HGT Accountancy/ERP
1 Visma Saturn & Payroll Scandinavia 2014 88,903 223,326 24.8 24.8
Sovos
2 Compliance HGT 7/HGT Tax & Accountancy N. America 2016 26,177 89,546 9.9 34.7
Tax &
Accountancy/ERP
3 IRIS HGT Saturn & Payroll UK 2018 36,380 64,047 7.1 41.8
4 Access HGT 8 ERP & Payroll UK 2018 30,491 56,949 6.3 48.1
5 Transporeon HGT 8/HGT ERP & Payroll Germany 2019 42,377 42,689 4.7 52.8
6 CogitalGroup HGT 7/HGT Tax & Accountancy UK 2016 20,966 40,434 4.5 57.3
Legal & Regulatory
7 Litera HGT 8 Compliance N. America 2019 34,242 39,887 4.4 61.7
Mobility
8 Holding HGT 8 Automotive Germany 2017 33,967 39,478 4.4 66.1
HGT 8/Mercury
9 team.blue 2 SME Tech & Services Benelux 2019 20,069 31,141 3.5 69.6
Legal & Regulatory
10 Mitratech HGT 7/HGT Compliance N. America 2017 22,258 23,640 2.6 72.2
Legal & Regulatory
11 Citation HGT 7 Compliance UK 2016 7,904 20,419 2.3 74.5
12 IT Relation HGT 8 SME Tech & Services Scandinavia 2018 16,037 20,121 2.2 76.7
13 P&I HGT 7/HGT ERP & Payroll Germany 2013 1,796 19,906 2.2 78.9
14 Allocate HGT 8 Healthcare IT UK 2018 13,959 19,177 2.1 81.0
A -- Plan
15 Group HGT 7 Insurance UK 2015 1,697 18,876 2.1 83.1
Mercury/Mercury Capital Markets
16 FE fundinfo 2 & Wealth Mgmt IT UK 2018 6,687 18,059 2.0 85.1
17 Commify Mercury/HGT SME Tech & Services UK 2017 4,080 17,969 2.0 87.1
Tax &
Accountancy/ERP
18 TeamSystem HGT 6 & Payroll Italy 2010 144 16,750 1.9 89.0
Transition
19 BrightPay Capital ERP & Payroll Ireland 2018 14,852 15,407 1.7 90.7
MediFox
20 DAN-Group Mercury 2/HGT Healthcare IT Germany 2018 11,832 14,235 1.6 92.3
21 Lyniate Mercury 2 Healthcare IT N. America 2018 10,528 10,002 1.1 93.4
Legal & Regulatory
22 STP Mercury Compliance Germany 2016 4,260 7,970 0.9 94.3
23 Evaluate Mercury Healthcare IT UK 2016 3,745 7,670 0.9 95.2
Legal & Regulatory
24 Achilles HGT Compliance UK 2008 17,298 7,339 0.8 96.0
25 Eucon Mercury Automotive/Insurance Germany 2015 4,658 6,650 0.7 96.7
26 Noventic HGT 6 Other Germany 2012 922 4,781 0.5 97.2
27 EidosMedia HGT 7 SME Tech & Services Italy 2015 7,467 4,444 0.5 97.7
Legal & Regulatory
28 Trace One Mercury Compliance France 2016 493 3,737 0.4 98.1
Project Other
29 Delta Mercury 2 Other Europe 2019 3,214 3,328 0.4 98.5
30 e-conomic HGT 6 Tax & Accountancy Scandinavia 2013 - 2,319 0.3 98.8
31 Gentrack HGT 7 Other New Zealand 2017 2,069 1,508 0.2 99.0
Non -- active investments
(5) 22,502 678 0.1 99.1
----------------------------- -------------------- ----------- ---------- -------- ------------ ------ -----
Total buyout investments
(36) 511,974 892,482 99.1
----------------------------- -------------------- ----------- ---------- -------- ------------ ------ -----
Currency
hedges Various Forward sale of US$ and EUR - 4,861 0.5 99.6
Renewable Asper RPP
energy I Renewable energy 5,040 1,808 0.2 99.8
Secondary
fund
interests Hg 6E Secondary fund interests - 1,215 0.2 100.0
------------ --------------- --------------------------------------------- -------- ------------ ------ -----
Total all
investments 517,014 900,366 100.0
------------ --------------- -------------------- ----------- ---------- -------- ------------ ------ -----
(1) Including accrued income but before the provision for
carried interest of GBP58,087,000.
Non-Statutory Accounts
The financial information set out below does not constitute the
Company's statutory accounts for the years ended 31 December 2018
and 2019 but is derived from those accounts. Statutory accounts for
2018 have been delivered to the Registrar of Companies, and those
for 2019 will be delivered in due course. The Auditors have
reported on those accounts; their report was (i) unqualified, (ii)
did not include a reference to any matters to which the Auditors
drew attention by way of emphasis without qualifying their report
and (iii) did not contain a statement under Section 498 (2) or (3)
of the Companies Act 2006. The text of the Auditors' report can be
found in the Company's full Annual Report and Accounts at
www.hgcapitaltrust.com
Financial statements
Income statement
for the year ended 31 December 2019
Revenue return Capital return Total return
---------------------------------------- ------
2019 2018 2019 2018 2019 2018
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
---------------------------------------- ------ --------- --------- --------- --------- --------- ---------
Gains on investments and liquidity
funds 13 - - 161,389 93,792 161,389 93,792
Gains/(losses) on priority
profit share loans
advanced to General Partners 5(b) - - 4,679 (6,325) 4,679 (6,325)
Net income 4 15,549 17,128 - - 15,549 17,128
Other expenses 6(a) (3,288) (2,468) - - (3,288) (2,468)
---------------------------------------- ------ --------- --------- --------- --------- --------- ---------
Net return before finance costs
and taxation 12,261 14,660 166,068 87,467 178,329 102,127
---------------------------------------- ------ --------- --------- --------- --------- --------- ---------
Finance costs 6(b) (755) (753) - - (755) (753)
---------------------------------------- ------ --------- --------- --------- --------- --------- ---------
Net return before taxation 11,506 13,907 166,068 87,467 177,574 101,374
---------------------------------------- ------ --------- --------- --------- --------- --------- ---------
Taxation 9(a) (80) (242) - - (80) (242)
---------------------------------------- ------ --------- --------- --------- --------- --------- ---------
Net return after taxation attributable
to reserves 11,426 13,665 166,068 87,467 177,494 101,132
---------------------------------------- ------ --------- --------- --------- --------- --------- ---------
Return per Ordinary share* 10(a) 2.94p 3.66p 42.77p 23.43p 45.71p 27.09p
---------------------------------------- ------ --------- --------- --------- --------- --------- ---------
*All per share workings have been restated for the ten for one share
split in May 2019.
The total return column of this statement represents HGT's income statement.
The supplementary revenue and capital return columns are both prepared
under guidance published by the Association of Investment Companies
('AIC'). All recognised gains and losses are disclosed in the revenue
and capital columns of the income statement and as a consequence, no
statement of comprehensive income has been presented.
The movements in reserves are set out in Note 21 to the financial statements.
All revenue and capital items in the above statement derive from continuing
operations.
No operations were acquired or discontinued during the year.
The following Notes form part of these financial statements.
Balance sheet
as at 31 December 2019
Notes 2019 2018
GBP'000 GBP'000
-------------------------------------------- ------ ------------ -----------
Fixed asset investments
------ ------------ -----------
Investments at fair value through
profit or loss:
------ ------------ -----------
Unquoted investments 12 788,013 609,663
-------------------------------------------- ------ ------------ -----------
Total fixed asset investments 788,013 609,663
-------------------------------------------- ------ ------------ -----------
Current assets - amounts receivable
after one year:
------ ------------ -----------
Accrued income on fixed assets 14 54,266 39,531
------ ------------ -----------
Current assets - amounts receivable
within one year:
------ ------------ -----------
Debtors 14 8,961 154
------ ------------ -----------
Investments at fair value through
profit or loss:
------ ------------ -----------
Liquidity funds 15 184,505 152,920
------ ------------ -----------
Uninvested capital in limited partnerships 226 169
------ ------------ -----------
Cash at bank 16 4,558 3,436
-------------------------------------------- ------ ------------ -----------
Total current assets 252,516 196,210
-------------------------------------------- ------ ------------ -----------
Creditors - amounts falling due
within one year 17 (1,231) (886)
-------------------------------------------- ------ ------------ -----------
Net current assets 251,285 195,324
-------------------------------------------- ------ ------------ -----------
Net assets 1,039,298 804,987
-------------------------------------------- ------ ------------ -----------
Capital and reserves:
------ ------------ -----------
Called up share capital 20 10,186 9,331
------ ------------ -----------
Share premium account 21 194,774 120,368
------ ------------ -----------
Capital redemption reserve 21 1,248 1,248
------ ------------ -----------
Capital reserve - unrealised 21 264,953 119,958
------ ------------ -----------
Capital reserve - realised 21 544,601 523,528
------ ------------ -----------
Revenue reserve 21 23,536 30,554
-------------------------------------------- ------ ------------ -----------
Total equity shareholders' funds 1,039,298 804,987
-------------------------------------------- ------ ------------ -----------
Net asset value per Ordinary share* 10(b) 255.1p 215.7p
-------------------------------------------- ------ ------------ -----------
Ordinary shares in issue at 31 December 407,424,808 37,324,698
-------------------------------------------- ------ ------------ -----------
*All per share workings have been restated for the ten for one share
split in May 2019.
The financial statements of H gCapital Trust plc (registered number
01525583) above (or on pages 77 to 100 in the full Annual Report
and Accounts) were approved and authorised for issue by the Board
of Directors on 6 March 2020 and signed on its behalf by:
Roger Mountford, Chairman
Richard Brooman, Director
The following Notes form part of these financial statements.
Statement of cash flows
for the year ended 31 December 2019
Notes 2019 2018
GBP'000 GBP'000
-------------------------------------------- ------ ---------- ----------
Net cash outflow from operating activities 7 (4,657) (17,850)
-------------------------------------------- ------ ---------- ----------
Investing activities:
------ ---------- ----------
Purchase of fixed asset investments 12 (117,284) (187,338)
------ ---------- ----------
Proceeds from the sale of fixed asset
investments 96,621 218,925
------ ---------- ----------
Purchase of liquidity funds 15 (90,000) (222,882)
------ ---------- ----------
Redemption of liquidity funds 15 61,100 226,578
-------------------------------------------- ------ ---------- ----------
Net cash (outflow)/inflow from investing
activities (49,563) 35,283
-------------------------------------------- ------ ---------- ----------
Financing activities:
------ ---------- ----------
Servicing of finance (1,475) (753)
------ ---------- ----------
Equity dividends paid 11 (18,444) (17,169)
------ ---------- ----------
Proceeds from issue of shares 75,261 -
-------------------------------------------- ------ ---------- ----------
Net cash inflow/(outflow) from financing
activities 55,342 (17,922)
-------------------------------------------- ------ ---------- ----------
Increase/(decrease) in cash and cash
equivalents in the year 16 1,122 (489)
-------------------------------------------- ------ ---------- ----------
Cash and cash equivalents at 1 January 16 3,436 3,925
-------------------------------------------- ------ ---------- ----------
Cash and cash equivalents at 31 December 16 4,558 3,436
-------------------------------------------- ------ ---------- ----------
The following Notes form part of these financial statements.
Statement of changes in equity
for the year ended 31 December 2019
Non-distributable Distributable
Capital Capital
Share Capital reserve reserve
Share premium redemption - - Revenue
capital account reserve unrealised realised reserve Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------------- ----- -------- -------- ----------- ----------- --------- -------- ---------
At 31 December
2018 9,331 120,368 1,248 119,958 523,528 30,554 804,987
Net return after
taxation - - - 144,995 21,073 11,426 177,494
Contributions of
equity
net of transaction
costs 855 74,406 - - - - 75,261
Equity dividends
paid 11 - - - - - (18,444) (18,444)
--------------------- ----- -------- -------- ----------- ----------- --------- -------- ---------
At 31 December 20,
2019 21 10,186 194,774 1,248 264,953 544,601 23,536 1,039,298
--------------------- ----- -------- -------- ----------- ----------- --------- -------- ---------
At 31 December
2017 9,331 120,368 1,248 79,256 476,763 34,058 721,024
Net return after
taxation - - - 40,702 46,765 13,665 101,132
Equity dividends
paid 11 - - - - - (17,169) (17,169)
--------------------- ----- -------- -------- ----------- ----------- --------- -------- ---------
At 31 December 20,
2018 21 9,331 120,368 1,248 119,958 523,528 30,554 804,987
--------------------- ----- -------- -------- ----------- ----------- --------- -------- ---------
The following Notes form part of these financial statements.
Notes to the financial statements
1. Principal activity
The principal activity of HGT is investment. HGT is an
investment company as defined by Section 833 of the Companies Act
2006 and an investment trust under Sections 1158 and 1159 of the
Corporation Tax Act 2010 ('CTA 2010'), and is registered as a
public company in England and Wales under number 01525583 with its
registered office at 2 More London Riverside, London SE1 2AP.
2. Basis of preparation
The financial statements have been prepared under the historical
cost convention, except for the revaluation of financial
instruments at fair value as permitted by the Companies Act 2006,
and in accordance with applicable UK law and UK Accounting
Standards ('UK GAAP'), including Financial Reporting Standard 102 -
'The Financial Reporting Standard applicable in the United Kingdom
and Republic of Ireland' ('FRS 102') and with the Statement of
Recommended Practice 'Financial Statements of Investment Trust
Companies and Venture Capital Trusts' ('SORP'), issued in October
2019. All of HGT's operations are of a continuing nature.
HGT has considerable financial resources and, as a consequence,
the Directors believe that HGT is well placed to manage its
business risks. After making enquiries, the Directors have a
reasonable expectation that HGT will have adequate resources to
continue in operational existence for the next twelve-month period
from the date of approval of this Report.
Accordingly, they continue to adopt the going concern basis in
preparing the Annual Report and Accounts. See above (or page 15 in
the full Annual Report and Accounts) for the Directors' commentary
on going concern.
The same accounting policies, presentation and methods of
computation are followed in these financial statements as applied
in HGT's previous annual audited report and accounts.
3. Organisational structure and accounting policies
Partnerships where HGT is the sole limited partner
HGT entered into eight separate partnership agreements with
general and founder partners in May 2003 (subsequently revised in
January 2009), January 2009, July 2011, March 2013, December 2016,
February 2017, January 2018 and February 2018; at each point an
investment holding limited partnership was established to carry on
the business of an investor, with HGT being the sole limited
partner in these entities.
The purpose of these partnerships, HGT LP, HGT 6 LP, HGT 7 LP,
HGT 8 LP, HgCapital Mercury D LP, HGT Mercury 2 LP, HGT Saturn LP
and HGT Transition Capital LP, (together the 'primary buyout
funds') is to hold all HGT's investments in primary buyouts. Under
the partnership agreements, HGT made capital commitments into the
primary buyout funds, with the result that HGT now holds direct
investments in the primary buyout funds and an indirect investment
in the fixed asset investments that are held by these funds, as it
is the sole limited partner. These direct investments are included
under fixed asset investments on the balance sheet and in the table
of investments on page 45 in the full Annual Report and Accounts.
The underlying investments that are held indirectly are included in
the overview of investments on page 52 in the full Annual Report
and Accounts.
Consolidated financial statements have not been prepared because
HGT does not have control over the operating and financial
activities of the underlying investment holding limited
partnerships, as the general partners are responsible for the
management of their activities.
Partnerships where HGT is a minority limited partner
In July 2011, HGT acquired a direct secondary investment in
HgCapital 6 E LP ('Hg 6E LP'), one of the partnerships that
comprise the Hg 6 Fund, in which HGT is now a limited partner pari
passu with other limited partners. This is a direct investment in
the Hg 6E LP Fund, as shown on the balance sheet and in the table
of investments on page 45.
HGT also entered into partnership agreements with other limited
partners with the purpose of investing in renewable energy projects
by making capital commitments in Asper Renewable Power Partners LP
('Asper RPP I LP') and Asper Renewable Power Partners 2 C LP
('Asper RPP II LP') (together the 'renewable funds'). These are
direct investments in the renewable funds, as shown on the balance
sheet and in the table of investments on page 45 in the full Annual
Report and Accounts.
Priority profit share and other operating expenses, payable by
partnerships in which HGT is a minority limited partner, are
recognised as unrealised losses in the capital return section of
the income statement and are not separately disclosed within other
expenses.
Priority profit share and carried interest under the primary
buyout limited partnership agreements
Under the terms of the primary buyout fund limited partnership
agreements ('LPAs'), each general partner (see Note 5) is entitled
to appropriate, as a first charge on the net income of the funds,
an amount equivalent to its priority profit share ('PPS'). HGT is
entitled to net income from the funds, after payment of the
PPS.
In years in which these funds have not yet earned sufficient net
income to satisfy the PPS, the entitlement is carried forward to
the following years. The PPS is payable quarterly in advance, even
if insufficient net income has been earned. Where the cash amount
paid exceeds the net income, an interest free loan is advanced to
the general partner by these primary buyout funds, which is funded
via a loan from HGT. Such loan is only recoverable from the general
partner by an appropriation of net income; until net income is
earned, no value is attributed to this loan (see Note 5(b)).
Furthermore, under the primary buyout funds' LPAs, each founder
partner (see Note 5(c)) is entitled to a carried interest
distribution once certain preferred returns are met. The LPAs
stipulate that the primary buyout funds' capital gains or net
income, after payment of the carried interest, are allocated to
HGT, when the right to these returns is established.
Accordingly, HGT's entitlement to net income and net capital
gains is shown in the appropriate lines of the income statement.
Notes 4, 5 and 12 to the financial statements disclose the gross
income and gross capital gains of the primary buyout funds and also
reflect the proportion of net income and capital gains in the
buyout funds that have been paid to the general partner as its PPS
and to the founder partner as carried interest, where
applicable.
The PPS paid from net income is charged to the revenue account
in the income statement, whereas PPS paid as an interest -- free
loan, if any, is charged as an unrealised depreciation to the
capital return on the income statement.
The carried interest payments made from net income and capital
gains are charged to the revenue and capital account respectively
on the income statement.
Investment income and interest receivable
As stated above, all income that is recognised by the primary
buyout funds, net of PPS, is allocated to HGT and recognised when
the right to this income is established. Income from Hg 6 E LP and
the renewable energy funds would normally consist of income
distributions and these distributions are recognised as income in
the financial statements of HGT when the right to such distribution
is established.
The accounting policies below apply to the recognition of income
by the primary buyout funds, prior to allocation between the
Partners:
Interest income on non -- equity shares and fixed income
securities is recognised on a time apportionment basis so as to
reflect the effective yield when it is probable that it will be
realised. Dividends receivable on unlisted equity shares where
there is no ex -- dividend date and on non -- equity shares are
brought into account when the right to receive payment is
established.
Income from listed equity investments, including taxes deducted
at source, is included in revenue by reference to the date on which
the investment is quoted ex -- dividend. Where dividends are
received in the form of additional shares rather than cash
dividends, the equivalent of the cash dividend is recognised as the
income in the revenue account and any excess in the value of the
shares received over the amount of the cash dividend is recognised
in the capital reserve - realised.
Expenses
All expenses are accounted for on an accruals basis. All
administrative expenses are charged wholly to the revenue
account.
Dividends
Dividend distributions to shareholders are recognised as a
liability in the year that they are approved unconditionally.
Current and other non -- current assets
Financial assets and financial liabilities are recognised in
HGT's balance sheet when HGT becomes a party to the contractual
provisions of the instrument. Trade receivables are stated at
nominal value. Appropriate allowances for estimated irrecoverable
amounts are recognised in the revenue return on the income
statement.
Cash comprises current accounts held with banks.
Foreign currency
The functional and presentation currency is pounds sterling,
reflecting the economic environment in which HGT predominantly
operates. All transactions in foreign currencies are translated
into sterling at the rates of exchange ruling at the dates of such
transactions and the resulting exchange differences are taken to
the capital reserve - realised or revenue, as appropriate. Foreign
currency assets and liabilities at the balance sheet date are
translated into sterling at the exchange rates ruling at that date
and the resulting exchange differences are taken to the capital
reserve - unrealised or revenue as appropriate.
Taxation
Income taxes represent the sum of the tax currently payable,
withholding taxes suffered and deferred tax. Tax is charged or
credited in the income statement. Deferred tax is recognised on all
timing differences at the reporting date. These timing differences
arise from the inclusion of income and expenses in tax assessments
in periods different from those in which they are recognised in the
financial statements.
Investments
The general principle applied is that investments should be
reported at 'fair value', in accordance with Sections 11 and 12 of
FRS 102 and the International Private Equity and Venture Capital
('IPEV') Valuation Guidelines, December 2018 edition. Where
relevant, HGT applies the policies stated below to the investments
held by the primary buyout funds, in order to determine the fair
value of its investments in these limited partnerships.
Purchases of investments are recognised on a trade date basis.
Sales of investments held through the primary buyout funds are
recognised at the trade date of the disposal. Sales from the
investments in Hg 6 E LP and the renewable energy funds would
normally consist of capital distributions and these distributions
are recognised as a realisation when the right to such distribution
is established. Proceeds are measured at fair value, which is
regarded as the proceeds of sale less any transaction costs.
Quoted: Quoted investments are held at fair value, which is
deemed to be their bid price.
Unquoted: Unquoted investments are also held at fair value and
are valued using the following guidelines:
(i) initially, investments are valued at the price of recent
investments less fees. Subsequently, investments are valued based
on (ii) to (iv) below;
(ii) the level of maintainable earnings or revenue and an
appropriate earnings or revenue multiple, unless (iv) is
required;
(iii) where more appropriate, investments can be valued based on
other methodologies, including using their net assets or discounted
cash flows, rather than on their earnings or revenue; and
(iv) appropriate fair value movements are made against all
individual valuations where necessary to reflect unsatisfactory
financial performance or a fall in comparable ratings.
Limited partnership funds: these are investments that are set up
by a manager in which HGT has a direct investment, but is not the
sole limited partner and does not hold a majority share. These
investments are valued at fair value, based on the Manager's
valuation after any adjustment required by the Directors.
Liquidity funds: these are short -- term investments made in a
combination of fixed and floating rate securities and are valued at
the current fair value as determined by the manager of the fund.
They can be realised at short notice.
Derivative financial instruments: derivative financial
instruments are held at fair value and are valued using quoted
market prices for financial instruments traded in active markets,
or dealer price quotations for financial instruments that are not
actively traded.
Both realised and unrealised gains and losses arising on fixed
asset investments, financial assets and liabilities and derivative
financial instruments, are taken to the capital reserves.
Capital reserves
Capital reserve - realised
The following are accounted for in this reserve:
(i) gains and losses on the realisation of investments;
(ii) attribution of gains to the founder partners for carried
interest;
(iii) losses on investments where there is little prospect of
realisation or recovering any value;
(iv) realised exchange differences of a capital nature; and
(v) expenses, together with the related taxation effect, charged
to this reserve in accordance with the above policies.
Capital reserve - unrealised
The following are accounted for in this reserve:
(i) increases and decreases in the valuation of investments held
at the year -- end;
(ii) increases and decreases in the valuation of the loans to
general partners; and
(iii) unrealised exchange differences of a capital nature.
Share capital
Ordinary shares issued are recognised based on the proceeds or
fair value received, with the excess of the amount received over
their nominal value being credited to the share premium account.
Direct issue costs are deducted from equity.
Critical accounting estimates and key sources of estimation
uncertainty
The preparation of these financial statements requires the use
of estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reported
year. Although these estimates are based on management's best
knowledge of the amount, event or actions, actual results may
ultimately differ from those estimates.
The estimates and assumptions are reviewed on an on -- going
basis. Revisions to accounting estimates are recognised in the
period in which the estimate is revised if the revision affects
only that period, or in the period of the revision and future
periods if the revision affects both current and future
periods.
The key accounting estimate is in respect of the determination
of the fair value of financial assets classified as fair value
through profit or loss (FVTPL). The methodology used in determining
fair values is disclosed above. An attribution analysis of
movements in the fair value of investments can be found on page 41
in the full Annual Report and Accounts and an analysis of the
trading performance and valuation and gearing analysis of the top
20 buyout investments by value can be found on pages 42 and 43 in
the full Annual Report and Accounts. A sensitivity analysis to
equity price risk can be found in Note 19.
4. Income
Revenue return
2019 2018
GBP'000 GBP'000
----------------------------- ------------ ------------
Total net income comprises:
Interest 15,549 16,349
Dividend - 706
Non-interest income - 73
----------------------------- ------------ ------------
Total net income 15,549 17,128
----------------------------- ------------ ------------
All income that is recognised by the primary buyout funds, net
of PPS, is allocated to HGT and recognised when the right to this
income is established. This income and PPS is analysed further
below.
Revenue return
2019 2018
GBP'000 GBP'000
--------------------------------------------------------- ------------- ------------
Income from investments held by the primary buyout
funds
Unquoted investment income 27,847 19,453
Dividend income - 706
Other investment income:
Unquoted investment income 1,378 1,161
Liquidity funds income 1,788 1,033
--------------------------------------------------------- ------------- ------------
Total investment income 31,013 22,353
--------------------------------------------------------- ------------- ------------
Total other income 46 128
--------------------------------------------------------- ------------- ------------
Total income 31,059 22,481
--------------------------------------------------------- ------------- ------------
Priority profit share charge against income:
Current year - HGT 8 LP (10,463) (1,315)
Current year - HGT 7 LP (2,148) (2,445)
Current year - HGT Mercury 2 LP (1,654) (736)
Current year - HGT Saturn LP (665) (304)
Current year - HgCapital Mercury D LP (392) (409)
Current year - HGT Transition Capital LP (188) (52)
Current year - HGT LP - (92)
--------------------------------------------------------- ------------- ------------
Total priority profit share charge against income (Note
5(a)) (15,510) (5,353)
--------------------------------------------------------- ------------- ------------
Total net income 15,549 17,128
--------------------------------------------------------- ------------- ------------
5. Priority profit share and carried interest
(a) Priority profit share payable to General Partners Revenue return
-------------------------------------------------------
2019 2018
GBP'000 GBP'000
------------------------------------------------------- -------------- -------------
Priority profit share payable:
Current year amount 10,831 11,678
Less: Current year loans advanced to General Partners
(Note 5(b)) (31) (6,325)
Add: Prior year loans received from General Partners 4,710 -
(Note 5(b))
------------------------------------------------------- -------------- -------------
Current year charge against income 15,510 5,353
------------------------------------------------------- -------------- -------------
Total priority profit share charge against income 15,510 5,353
------------------------------------------------------- -------------- -------------
The priority profit share payable on the primary buyout funds
rank as a first appropriation of net income from investments held
in these partnerships respectively and is deducted prior to such
income being attributed to HGT in its capacity as a Limited
Partner. The net income of the primary buyout funds earned during
the year, after the deduction of the priority profit share, is
shown on the income state ment. Details of these arrangements are
disclosed in the Directors' report on page 110 in the full Annual
Report and Accounts.
The terms of the above priority profit share arrangements during
2019 were:
Primary buyout Fund Priority profit share
partnership
----------------------- ----------------------------------------------------
HGT 8 LP 1.75% on the fund commitment during the investment
period
HGT Mercury 2 LP 1.75% on the fund commitment during the investment
period
HGT 7 LP 1.5% of original cost of investments in the fund
less the original cost of investments that have
been realised or written -- off
HgCapital Mercury 1.5% of original cost of investments in the fund
D LP less the original cost of investments that have
been realised or written -- off
HGT 6 LP 1.5% of original cost of investments in the fund
less the original cost of investments that have
been realised or written -- off
HGT Saturn LP 1.0% on invested capital
HGT Transition Capital 1.25% on invested capital
LP
HGT LP 0.5% on the value of investments in fund, excluding
co -- investments
----------------------- ----------------------------------------------------
In addition, priority profit shares are payable on partnerships
where HGT is a minority limited partner invested pari passu with
other institutional investors. These amounts are initially and
indirectly funded by HGT through the amounts invested in these
partnerships and these amounts are recognised as unrealised losses
in the capital account in the income statement.
Fund partnership Priority profit share
---------------------- --------------------------------------------------
Hg 6 E LP 1.5% of original cost of investments in the fund,
less the original cost of investments that have
been realised or written -- off.
Asper Renewable Power 1.25% of lesser of value or cost of investments.
Partners 2 C LP
Asper Renewable Power 1.5% of original cost of investments in the fund,
Partners LP less the original cost of investments that have
been realised or written -- off.
---------------------- --------------------------------------------------
(b) Priority profit share loans to General Partners Capital return
-----------------------------------------------------
2019 2018
GBP'000 GBP'000
----------------------------------------------------- ------------- -------------
Movement on loans to General Partners:
Losses on current year loans advanced to General
Partners (31) (6,325)
Gains on prior year loans recovered from General 4,710 -
Partners
----------------------------------------------------- ------------- -------------
Total gains/(losses) on priority profit share loans
advanced to General Partners 4,679 (6,325)
----------------------------------------------------- ------------- -------------
In years in which the funds described in Note 5(a) have not yet
earned sufficient net income to satisfy the priority profit share,
the entitlement is carried forward to the following years. The
priority profit share is payable quarterly in advance, even if
insufficient net income has been earned. Where the cash amount paid
exceeds the net income, an interest free loan is advanced to the
general partner by these primary buyout funds, which is funded via
a loan from HGT. Such loan is only recoverable from the general
partner by an appropriation of net income, until sufficient net
income is earned, no value is attributed to this loan and hence an
unrealised capital loss is recognised and reversed if sufficient
income is subsequently generated.
(c) Carried interest to Founder Partners Capital return
---------------------------------------------------------
2019 2018
GBP'000 GBP'000
--------------------------------------------------------- ------------- -------------
Carried interest charge against capital gains:
Current year charge against realised capital gains 1,511 55,023
Current year charge/(credit) against unrealised capital
gains 15,775 (40,599)
--------------------------------------------------------- ------------- -------------
Total carried interest charge against capital gains 17,286 14,424
--------------------------------------------------------- ------------- -------------
The carried interest payable ranks as a first appropriation of
capital gains, after preferred return, on the investments held in
the primary buyout funds, limited partnerships established solely
to hold HGT's investments, and is deducted prior to such gains
being paid to HGT in its capacity as a Limited Partner. The net
amount of capital gains of the primary buyout funds during the
year, after the deduction of carried interest, is shown in the
income statement.
The details of the carried interest contracts, disclosed in the
Directors' report on page 110 in the full Annual Report and
Accounts, state that carried interest is payable once a certain
level of repayments have been made to HGT. Based on the repayments
made during 2019, GBP1,511,000 (2018: GBP55,023,000) of carried
interest was paid in respect of the current financial year. If the
investments in HGT 6 LP, HGT 7 LP, HgCapital Mercury D LP and Hg 6
E LP are realised at the current fair value and then distributed to
Partners, an amount of GBP58,087,000 will be payable to the Founder
Partner (2018: GBP42,312,000 payable to the Founder Partner) and
therefore the Directors have made a provision for this amount (see
Note 12). No provision is required in respect of HGT's investment
in the other fund limited partnerships, because they are still in
their investment period.
6. Other expenses
Revenue return
(a) Operating expenses 2019 2018
GBP'000 GBP'000
--------------------------------------------------- ------------- ------------
Registrar, management and administration fees 975 837
Directors' remuneration (Note 8) 284 261
Legal and other administration costs(1) 1,927 1,302
--------------------------------------------------- ------------- ------------
3,186 2,400
--------------------------------------------------- ------------- ------------
Fees payable to HGT's auditor in relation to HGT:
Audit fees(2) 102 68
--------------------------------------------------- ------------- ------------
Total fees payable to HGT's auditor 102 68
--------------------------------------------------- ------------- ------------
Total other expenses 3,288 2,468
--------------------------------------------------- ------------- ------------
(1) Includes employer's National Insurance contributions of
GBP31,838 (2018: GBP29,427).
(2) In addition to the audit fees payable to the auditor in
relation to HGT, audit fees payable to the auditor in respect of
the audit of the primary buyout funds were GBP46,000 (2018:
GBP44,000).
Revenue return
(b) Finance costs 2019 2018
GBP'000 GBP'000
----------------------------------------- ------------- ------------
Non-utilisation fees and other expenses 755 753
Total finance costs 755 753
----------------------------------------- ------------- ------------
7. Cash flow from operating activities
Reconciliation of net return before finance costs 2019 2018
and taxation GBP'000 GBP'000
to net cash flow from operating activities
------------------------------------------------------- ---------- ---------
Net return before finance costs and taxation 178,329 102,127
Gains on investments held at fair value and liquidity
funds (179,785) (54,297)
Carried interest paid (1,511) (55,023)
Increase/(decrease) in carried interest provision 15,775 (40,599)
Increase in accrued income from liquidity funds (1,788) (1,033)
(Increase)/decrease in prepayments, accrued income
and other debtors (15,989) 31,577
Increase/(decrease) in creditors 288 (616)
Taxation received 24 14
------------------------------------------------------- ---------- ---------
Net cash outflow from operating activities (4,657) (17,850)
------------------------------------------------------- ---------- ---------
8. Directors' remuneration
The aggregate remuneration of the Directors for the year to 31
December 2019 was GBP284,000 (2018: GBP261,462). Further
information on the Directors' remuneration is disclosed in the
Directors' remuneration report on pages 125 to 128 in the full
Annual Report and Accounts.
9. Taxation
In the opinion of the Directors, HGT has complied with the
requirements of Section 1158 and Section 1159 of the CTA 2010 and
will therefore be exempt from corporation tax on any capital gains
reported in the capital return during the year. To the extent
possible, HGT will elect to designate all of the proposed dividend
(see Note 11) as an interest distribution to its shareholders. This
distribution is treated as a tax deduction against taxable income
in the revenue return and results in a reduction of corporation tax
being payable by HGT at 31 December 2019.
The rate of corporation tax in the UK for a company was 19%
during the year (2018: tax rate of 19%). However, the tax charge in
the current and prior year was lower than the standard and
effective tax rate, largely due to the reduction in corporation tax
from the interest distribution noted above. The effect of this and
other items affecting the tax charge is shown in Note 9(b)
below.
Revenue return
(a) Analysis of charge in the year 2019 2018
GBP'000 GBP'000
------------------------------------------------------- ------------- ------------
Current tax:
UK corporation tax 1,626 2,173
Income streaming relief (1,626) (2,173)
Prior year adjustment (24) (17)
------------------------------------------------------- ------------- ------------
Current revenue tax credit for the year (24) (17)
------------------------------------------------------- ------------- ------------
Deferred tax:
Reversal of timing differences 104 259
------------------------------------------------------- ------------- ------------
Total deferred tax charge for the year (Note 9(c)) 104 259
------------------------------------------------------- ------------- ------------
Total taxation charge 80 242
------------------------------------------------------- ------------- ------------
Revenue return
(b) Factors affecting current tax charge for the year 2019 2018
GBP'000 GBP'000
------------------------------------------------------- ------------- ------------
Net revenue return before taxation 11,506 13,907
------------------------------------------------------- ------------- ------------
UK corporation tax charge at 19% thereon (2018: 19%) 2,186 2,642
------------------------------------------------------- ------------- ------------
Effects of:
Tax relief from interest distribution (1,626) (2,173)
Tax relief from expenses allocated to capital (456) (210)
Prior year tax adjustment (24) (17)
------------------------------------------------------- ------------- ------------
Total differences (2,106) (2,400)
------------------------------------------------------- ------------- ------------
Total taxation charge 80 242
------------------------------------------------------- ------------- ------------
Revenue return
(c) Deferred tax 2019 2018
GBP'000 GBP'000
------------------------------------------------------ ------------- ------------
Deferred tax:
Movement in taxable income not recognised in revenue
return 104 259
------------------------------------------------------ ------------- ------------
Total deferred tax charge for the year (Note 9(a)) 104 259
------------------------------------------------------ ------------- ------------
Deferred tax recoverable:
Recoverable deferred tax at 31 December 104 363
Deferred tax charge for the year (104) (259)
------------------------------------------------------ ------------- ------------
Recoverable deferred tax at end of year (Note 14) - 104
------------------------------------------------------ ------------- ------------
Deferred tax assets of GBPnil were recognised at 31 December
2019 (2018: GBP104,000 at a 19% tax rate)
10. Return and net asset value per Ordinary share
(a) Return per Ordinary share Revenue return Capital return
-------------------------------------
2019 2018 2019 2018
------------------------------------- ---------------- -------------- ---------------- --------------
Amount (GBP'000):
Net return after taxation 11,426 13,665 166,068 87,467
------------------------------------- ---------------- -------------- ---------------- --------------
Weighted average number of Ordinary
shares ('000):
Weighted average number of Ordinary
shares in issue 388,267 37,325 388,267 37,325
------------------------------------- ---------------- -------------- ---------------- --------------
Return per Ordinary share (pence)* 2.94 3.66 42.77 23.43
------------------------------------- ---------------- -------------- ---------------- --------------
*All per share workings have been restated for the ten for one
share split in May 2019.
Capital return
(b) Net asset value per Ordinary share 2019 2018
--------------------------------------------- -------------- -----------
Amount (GBP'000):
Net assets 1,039,298 804,987
--------------------------------------------- -------------- -----------
Number of Ordinary shares ('000):
Number of Ordinary shares in issue 407,425 37,325
--------------------------------------------- -------------- -----------
Net asset value per Ordinary share (pence)* 255.1 215.7
--------------------------------------------- -------------- -----------
*All per share workings have been restated for the ten for one
share split in May 2019.
11. Dividends on Ordinary shares
2019 2018
Record date Payment date GBP'000 GBP'000
---------------------------------------- -------------- --------------- -------- ---------
Interim Dividend of 1.8p for the year 20 September 25 October 7,247 -
ended 31 December 2019 2019 2019
Final Dividend of 30.0p for the year 22 March 2019 30 April 11,197 -
ended 31 December 2018 2019
Interim Dividend of 16.0p for the year 20 September 26 October
ended 31 December 2018 2018 2018 - 5,972
Final Dividend of 30.0p for the year 27 April
ended 31 December 2017 29 March 2018 2018 - 11,197
---------------------------------------- -------------- --------------- -------- ---------
Total equity dividends paid 18,444 17,169
------------------------------------------------------------------------- -------- ---------
The proposed final dividend of 3.0p per Ordinary share for the
year ended 31 December 2019 is subject to approval by the
shareholders at the annual general meeting and has not been
included as a liability in these financial statements. The total
dividends payable in respect of the financial year, which form the
basis of the retention test as set out in Section 1159 of the CTA
2010, are set out below:
2019 2019
GBP'000 GBP'000
------------------------------------------------- --------- ---------
Revenue available for distribution by way of
dividend for the year 11,426 13,665
Interim dividend of 1.8p for the year ended
31 December 2019 (paid on 25 October 2019) (7,247) (5,972)
Proposed final dividend of 3.0p for the year
ended 31 December 2019
(based on 407,424,808 Ordinary shares in issue
at 31 December 2019) (12,223) (11,197)
------------------------------------------------- --------- ---------
Distributions in excess of revenue for Section
1159 purposes* (8,044) (3,504)
------------------------------------------------- --------- ---------
*Distributions in excess of revenue are financed by the revenue
reserve
12. Fixed asset investments
2019 2018
GBP'000 GBP'000
------------------------------------------------ --------- ---------
Investments held at fair value through profit
or loss:
Unquoted investments held in HGT 7 LP 255,127 248,186
Unquoted investments held in HGT 8 LP 217,635 93,887
Unquoted investments held in HGT LP 137,075 111,544
Unquoted investments held in HGT Saturn LP 114,981 66,427
Unquoted investments held in HGT Mercury 2
LP 39,679 37,105
Unquoted investments held in HgCapital Mercury
D LP 38,432 38,595
Unquoted investments held in HGT 6 LP 24,099 18,275
Unquoted investments held in HGT Transition
Capital LP 16,049 14,962
Other unquoted investments held by HGT 3,023 22,994
------------------------------------------------ --------- ---------
Total fixed asset investments gross of carried
interest provision 846,100 651,975
------------------------------------------------ --------- ---------
Carried interest provision (Note 5(c)) (58,087) (42,312)
------------------------------------------------ --------- ---------
Total fixed asset investments 788,013 609,663
------------------------------------------------ --------- ---------
Total fixed asset investments consist of:
------------------------------------------------ --------- ---------
Fund limited partnerships 788,013 609,663
------------------------------------------------ --------- ---------
2019 2018
GBP'000 GBP'000
------------------------------------------------------------------------------------------------------------------------------------------- ---------- ----------
Opening valuation as at 1 January 609,663 490,976
Opening unrealised appreciation - investments (173,265) (166,260)
Opening carried interest provision 42,312 82,911
------------------------------------------------------------------------------------------------------------------------------------------- ---------- ----------
Opening book cost as at 1 January 478,710 407,627
------------------------------------------------------------------------------------------------------------------------------------------- ---------- ----------
Movements in the year:
Additions at cost 117,284 187,338
Disposals - proceeds (103,558) (218,925)
-
realised
gains on
sales 24,578 102,670
------------------------------------------------------------------------------------------------------------------------------------------- ---------- ----------
Closing book cost of investments 517,014 478,710
------------------------------------------------------------------------------------------------------------------------------------------- ---------- ----------
Add: closing unrealised appreciation - investments 329,086 173,265
Less: closing carried interest provision (58,087) (42,312)
------------------------------------------------------------------------------------------------------------------------------------------- ---------- ----------
Closing valuation of investments at 31 December 788,013 609,663
------------------------------------------------------------------------------------------------------------------------------------------- ---------- ----------
The investments above include investments in companies that are
indirectly held by HGT through its investment in the primary buyout
funds as set out in Note 3 on page 82 in the full Annual Report and
Accounts, and investments in fund limited partnerships in Hg 6 E
LP, Asper Renewable Power Partners LP and Asper Renewable Power
Partners 2 C LP. The net assets attributable to partners at 31
December 2018, being the date of the last audited balance sheet, of
these primary buyout funds were GBP121,583,668 (HGT LP),
GBP18,262,107 (HGT 6 LP), GBP265,824,438 (HGT 7 LP), GBP44,339,307
(HgCapital Mercury D LP), GBP97,461,321 (HGT 8 LP), GBP37,671,909
(HGT Mercury 2 LP), GBP67,761,370 (HGT Saturn LP) and GBP15,643,564
(HGT Transition Capital LP).
13. Gains on investments and liquidity funds
Capital return
2019 2018
GBP'000 GBP'000
-------------------------------------------------------- ------------- ------------
Realised:
Realised gains/(losses) - fixed asset investments 24,578 102,670
- liquidity funds 408 1,057
- aborted deal fees (2,402) (1,939)
-------------------------------------------------------- ------------- ------------
22,584 101,788
-------------------------------------------------------- ------------- ------------
Carried interest charge against realised capital gains
(Note 5(c)) (1,511) (55,023)
-------------------------------------------------------- ------------- ------------
Net realised gains 21,073 46,765
-------------------------------------------------------- ------------- ------------
Unrealised:
Unrealised gains/(losses) - fixed asset investments 155,821 7,005
- aborted deal fees (219) 835
- liquidity funds 489 (1,412)
-------------------------------------------------------- ------------- ------------
156,091 6,428
-------------------------------------------------------- ------------- ------------
Carried interest (charge)/credit against unrealised
capital gains (Note 5(c)) (15,775) 40,599
-------------------------------------------------------- ------------- ------------
Net unrealised gains 140,316 47,027
-------------------------------------------------------- ------------- ------------
Total gains 161,389 93,792
-------------------------------------------------------- ------------- ------------
Page 41 of the Manager's Review in the full Annual Report and
Accounts contains an analysis of all material realised and
unrealised movements in value of individual investments held as
fixed asset investments, in accordance with paragraph 28 and 29 of
the 'SORP'.
14. Debtors and accrued income
2019 2018
GBP'000 GBP'000
------------------------------------------------------------------------------------------------ --------- ---------
Amounts receivable after one year:
Accrued income on fixed assets 54,266 39,531
------------------------------------------------------------------------------------------------ --------- ---------
Amounts receivable within one year:
Deferred tax recoverable (Note 9(c)) - 104
Prepayments and accrued income 2,024 50
Deferred consideration 6,937 -
------------------------------------------------------------------------------------------------ --------- ---------
Total amounts receivable within one year 8,961 154
------------------------------------------------------------------------------------------------ --------- ---------
Total debtors 63,227 39,685
------------------------------------------------------------------------------------------------ --------- ---------
The Directors consider that the carrying amount of debtors
approximates their fair value.
15. Liquidity funds
2019 2018
GBP'000 GBP'000
----------------------------------------------------------------------------------------------- --------- ----------
Investments held at fair value through
profit
or loss:
Opening valuation 152,920 155,938
Purchases at cost 90,000 222,882
Redemptions (61,100) (226,578)
Movement in unrealised capital
gains/(losses) 489 (1,412)
Movement in accrued income 1,788 1,033
Realised capital gains 408 1,057
----------------------------------------------------------------------------------------------- --------- ----------
Closing valuation 184,505 152,920
----------------------------------------------------------------------------------------------- --------- ----------
16. Movement in net funds
2019 2018
GBP'000 GBP'000
------------------------------------------------------------------------------------------------ --------- ---------
Analysis and reconciliation of net funds:
Change in cash 1,122 (489)
Net funds at 1 January 3,436 3,925
------------------------------------------------------------------------------------------------ --------- ---------
Net funds at 31 December 4,558 3,436
------------------------------------------------------------------------------------------------ --------- ---------
Net funds comprise:
------------------------------------------------------------------------------------------------ --------- ---------
Cash 4,558 3,436
------------------------------------------------------------------------------------------------ --------- ---------
17. Creditors - amounts falling due within one year
2019 2018
GBP'000 GBP'000
----------------------------------------------------------------------- --------- ---------
Accruals 1,231 886
Total creditors 1,231 886
----------------------------------------------------------------------- --------- ---------
The Directors consider that the carrying amount of creditors
approximates their fair value.
18. Bank facility
On 24 August 2011, HGT entered into a GBP40,000,000 multi --
currency revolving credit standby facility on an unsecured basis.
In December 2015, the facility was extended by a further three and
a half years to 30 June 2019. In addition, the facility was
increased to GBP80,000,000. Under the facility agreement, HGT is
liable to pay interest on any drawn amount at LIBOR plus a margin
of 2.25% to 2.50%, dependent on the loan to value ratio. A
commitment fee of 0.9% p.a. is liable on any undrawn commitment. In
March 2019, the facility was extended until 30 June 2022 with the
option of adding a further GBP80 million via an 'accordion'
facility, subject to the bank's agreement at the time. The facility
was undrawn as at the end of the year.
19. Financial risk
The following disclosures relating to the risks faced by HGT are
provided in accordance with sections 11 and 12 of FRS 102. The
reference to investments in this Note is in relation to HGT's
direct investments in Asper RPP I LP, Asper RPP II LP, Hg 6E LP and
the underlying investments in HGT LP, HGT 6 LP, HGT 7 LP, HGT 8 LP,
HgCapital Mercury D LP,HGT Mercury 2 LP, HGT Saturn LP and HGT
Transition Capital LP as described in Note 3 on page 82 in the full
Annual Report and Accounts.
Financial instruments and risk profile
HGT's investment objective is to achieve long -- term capital
appreciation by indirectly investing in unquoted companies. It does
this through its investments in fund partnerships, mostly in the UK
and Europe. Additionally, HGT holds UK Government securities, cash,
liquidity funds and items such as debtors and creditors arising
directly from its operations. In pursuing its investment objective,
HGT is exposed to a variety of risks that could result in either a
reduction of HGT's net assets or a reduction in the profits
available for distribution by way of dividends. Valuation risk,
market risk (comprising currency risk and interest rate risk),
liquidity risk and credit risk, and the Directors' approach to the
management of them, are described below. The Board and Hg
coordinate HGT's risk management. The objectives, policies and
processes for managing the risks, and the methods used to manage
the risks, that are set out below, have not changed from the
previous accounting period.
Valuation risk
HGT's exposure to valuation risk arises mainly from movements in
the value of the underlying investments (held through fund
partnerships), the majority of which are unquoted. A breakdown of
HGT's portfolio is given on page 45 in the full Annual Report and
Accounts and a breakdown of the most significant underlying
investments is given on page 52 in the full Annual Report and
Accounts. In accordance with HGT's accounting policies, the
investments in fund limited partnerships are valued by reference to
their underlying unquoted investments, which are valued by the
Directors following the IPEV Valuation Guidelines. HGT does not
hedge against movements in the value of these investments, apart
from foreign exchange movements as explained below, though the
borrowing arranged to fund these investments is normally
denominated in the currency in which the business is operating and
valued (see page 97 in the full Annual Report and Accounts). HGT
has exposure to interest rate movements, through bank deposits and
liquidity funds.
In the opinion of the Directors, the diversified nature of HGT's
investments significantly reduces the risks of investing in
unquoted companies.
FRS 102 requires HGT to classify fair value measurements using a
fair value hierarchy that reflects the significance of the inputs
used in making the measurements. The fair value hierarchy has the
following levels:
-- Quoted prices (unadjusted) in active markets for identical
assets or liabilities (level 1).
-- Inputs other than quoted prices included within level 1 that
are observable for the asset or liability, either directly (that
is, as prices) or indirectly (that is, derived from prices) (level
2).
-- Inputs for the asset or liability that are not based on
observable market data (that is, unobservable inputs) (level
3).
The level in the fair value hierarchy, within which the fair
value measurement is categorised in its entirety, is determined on
the basis of the lowest level input that is significant to the fair
value measurement in its entirety. For this purpose, the
significance of an input is assessed against the fair value
measurement in its entirety. If a fair value measurement uses
observable inputs that require significant adjustment based on
unobservable inputs, that is a level 3 measurement. Assessing the
significance of a particular input to the fair value measurement in
its entirety requires judgement, considering factors specific to
the asset or liability.
The determination of what constitutes an 'observable' input
requires significant judgement by the Board. The Board considers
observable data relating to investments actively traded in
organised financial markets, in which case fair value is generally
determined by reference to stock exchange quoted market bid prices
at the close of business on the balance sheet date, without
adjustment for transaction costs necessary to realise the
asset.
The following table analyses, within the fair value hierarchy,
the fund's financial assets (by class) measured at fair value at 31
December.
Level Level Level Total
1 2 3 GBP'000
GBP'000 GBP'000 GBP'000
----------------------------------------------- ---------- --------- --------- ---------
Investments held at fair value through profit
or loss:
Unquoted investments - Investment in HGT
7 LP - - 255,127 255,127
- Investment in HGT 8 LP - - 217,635 217,635
- Investment in HGT LP - - 137,075 137,075
- Investment in HGT Saturn LP - - 114,981 114,981
- Investment in HGT Mercury 2 LP - - 39,679 39,679
- Investment in HgCapital Mercury D LP - - 38,432 38,432
- Investment in HGT 6 LP - - 24,099 24,099
- Investment in HGT Transition Capital LP - - 16,049 16,049
- Investment in Asper RPP I LP - - 1,808 1,808
- Investment in Hg 6 E LP - - 1,215 1,215
- Liquidity funds - 184,505 - 184,505
- Carried interest provision - - (58,087) (58,087)
- Uninvested capital in limited partnerships - - 226 226
----------------------------------------------- ---------- --------- --------- ---------
As at 31 December 2019 - 184,505 788,239 972,744
----------------------------------------------- ---------- --------- --------- ---------
Level Level Level Total
1 2 3 GBP'000
GBP'000 GBP'000 GBP'000
----------------------------------------------- ---------- --------- --------- ---------
Investments held at fair value through profit
or loss:
Unquoted investments - Investment in HGT
7 LP - - 248,186 248,186
- Investment in HGT LP - - 111,544 111,544
- Investment in HGT 8 LP - - 93,887 93,887
- Investment in HGT Saturn LP - - 66,427 66,427
- Investment in HgCapital Mercury D LP - - 38,595 38,595
- Investment in HGT Mercury 2 LP - - 37,105 37,105
- Investment in Asper RPP II LP - - 20,266 20,266
- Investment in HGT 6 LP - - 18,275 18,275
- Investment in HGT Transition Capital LP - - 14,962 14,962
- Investment in Asper RPP I LP - - 1,766 1,766
- Investment in Hg 6 E LP - - 962 962
- Liquidity funds - 152,920 - 152,920
- Carried interest provision - - (42,312) (42,312)
- Uninvested capital in limited partnerships - - 169 169
----------------------------------------------- ---------- --------- --------- ---------
As at 31 December 2018 - 152,920 609,832 762,752
----------------------------------------------- ---------- --------- --------- ---------
Investments whose values are based on quoted market prices in
active markets, and therefore classified within level 1, include
government securities and actively traded listed equities. HGT does
not adjust the quoted bid price of these investments.
Financial instruments that trade in markets that are not
considered to be active, but are valued based on quoted market
prices, dealer quotations or alternative pricing sources supported
by observable inputs, are classified within level 2. As level 2
investments include positions that are not traded in active markets
and/or are subject to transfer restrictions, valuations may be
adjusted to reflect illiquidity and/or non -- transferability,
which are generally based on available market information.
Investments classified within level 3 have significant
unobservable inputs. Level 3 instruments include private equity and
corporate debt securities. As observable prices are not available
for these securities, the Board has used valuation techniques to
derive the fair value. In respect of unquoted instruments, or where
the market for a financial instrument is not active, fair value is
established by using recognised valuation methodologies, in
accordance with IPEV Valuation Guidelines. Fair value is the amount
for which an asset could be exchanged between knowledgeable,
willing parties in an arm's length transaction.
There were no transfers of assets from level 1 to level 2 or 3,
level 2 to level 1 or 3 and level 3 to level 1 or 2.
The following table presents the movement in level 3 investments
for the year ended 31 December 2019 by class of financial
instrument.
Total Investments in limited 2019 2018
partnerships GBP'000 GBP'000
----------------------------------------------------------------------------------------------- --------- ----------
Unquoted investments:
Opening balance 609,663 490,976
Purchases 117,284 187,338
Realisations at 31 December 2018
valuation (78,630) (179,458)
Unrealised appreciation of fixed asset
investments 155,471 70,208
Movement in net carried interest
provision (15,775) 40,599
----------------------------------------------------------------------------------------------- --------- ----------
Closing unrealised valuation of level 3
investments 788,013 609,663
----------------------------------------------------------------------------------------------- --------- ----------
Equity price risk
Equity price risk is the risk of a fall in the fair value of
HGT's ownership interests (comprising equities and shareholder
loans) held by HGT indirectly through its direct investments in
fund limited partnerships. The Board revalues each investment on a
quarterly basis. The Board manages the risks inherent in HGT's
investment activities by ensuring full and timely access to
relevant information from Hg. The Board meets regularly and at each
meeting reviews the trading performance of the principal underlying
investments. If there appears to the Board to be a fair value
movement in value between regular valuations, it can revalue the
investment. The Board also monitors Hg's compliance with HGT's
investment objective and investment policy.
For unquoted equity investments, the market risk variable is
deemed to be the multiples applied to a maintainable earnings
figure to calculate the individual investment valuations within
each of the primary buyout funds; borrowing is then deducted to
arrive at a valuation of the net equity held by HGT. These
multiples are largely based on the historic trading multiples of
comparable businesses and therefore there is a potential impact on
the valuation of unquoted investments of a fall in global equity
markets. Hg's best estimate of the effect on the net assets of HGT
due to a 1x reduction in the multiples applied to calculate the
enterprise value of all unquoted investments, with all other
variables held constant, is as follows:
NAV per
Ordinary
Change share
% GBP'000 Pence
--------------------------------------------- -------- -------- ----------
Sensitivity to equity price risk:
1x reduction in EV to EBITDA multiple
applied to unquoted investments
--------------------------------------------- -------- -------- ----------
Change in the value of unquoted investments -59,864 -14.7
------------------------------------------------------- -------- ----------
A fall in the value of unquoted investments could be mitigated
to some degree by a reduction in the provision for carried interest
(GBP58 million at 31 December 2019), but only in funds where an
adjustment for carried interest is required (Hg Genesis 6, Hg
Genesis 7 and Mercury 1, see Note 5(c) above or on page 87 in the
full Annual Report and Accounts). Hg's best estimate of the impact
on the carried interest provision of the above change in value of
unquoted investments is a reduction in the provision of
GBP5,722,000 (or 1.4 pence per ordinary share). There are likely to
be other correlations (either positive or negative) between the
assumptions and other factors. Other inputs, such as the earnings
of individual investments within the primary buyout funds are
likely to have a significant impact on the value of unquoted
investments. See page 42 of the Manager's report in the full Annual
Report and Accounts for an analysis of the portfolio trading
performance as at 31 December 2019. have a significant impact on
the value of unquoted investments. The Board regularly stress tests
the NAV.
Credit risk
Credit risk is the risk of financial loss in the event that any
of HGT's market counterparties fail to fulfil their contractual
obligations to HGT. HGT's financial assets (excluding fixed asset
investments) that are subject to credit risk, were neither impaired
nor overdue at the year -- end. HGT's cash balances were held with
the Royal Bank of Scotland International and amounts not required
for day -- to -- day use were invested in liquidity funds managed
by Royal London Asset Management which are rated AAA by Fitch.
Foreign exchange forward contracts and options are held with
counterparties which have credit ratings which the Board considers
to be adequate. The Board regularly monitors the credit quality and
financial position of these market counterparties. The credit
quality of the above mentioned financial assets was deemed
satisfactory.
Market risk
The fair value of future cash flows of a financial instrument
held by HGT may fluctuate due to changes in market prices of
comparable businesses. This market risk may comprise: currency risk
(see below), interest rate risk and/or equity price risk (see
above). The Board of Directors reviews and agrees policies for
managing these risks. Hg assesses the exposure to market risk when
making each investment decision, and monitors the overall level of
market risk across all of HGT's investments on an ongoing
basis.
Currency risk and sensitivity
HGT is exposed to currency risk as a result of investing in fund
partnerships which invest in companies that operate and are
therefore valued in currencies other than sterling. The value of
these assets in sterling, being HGT's functional currency, can be
significantly influenced by movements in foreign exchange rates.
Borrowing raised to fund each acquisition in such companies is
normally denominated in the currency in which the business is
operating and valued, thus limiting HGT's exposure to the value of
its investments, rather than the gross enterprise value. From time
to time, HGT is partially hedged against movements in the value of
foreign currency against sterling where a movement in exchange rate
could affect the value of an investment, as explained below. Hg
monitors HGT's exposure to foreign currencies and reports to the
Board on a regular basis. The following table illustrates the
sensitivity of the revenue and capital return for the year in
relation to HGT's year -- end financial exposure to movements in
foreign exchange rates against sterling. The rates represent the
range of movements against sterling over the current year for the
currencies listed, and are considered the best estimate for
movements looking forward.
In the opinion of the Directors, the sensitivity analysis below
may not be representative of the year as a whole, since the level
of exposure changes as HGT's holdings change through the purchase
and realisation of investments to meet HGT's objectives.
2019 2018
Revenue return Capital return Revenue return Capital return
GBP'000 NAV GBP'000 NAV GBP'000 NAV GBP'000 NAV
per per per per
Ordinary Ordinary Ordinary Ordinary
share share share share
Pence Pence Pence Pence
---------------------------- -------- ---------- --------- ---------- -------- ---------- --------- ----------
Highest value against
sterling
during the year:
Danish krone (2019: 8.0395
/ 2018: 8.2009) 141 0.3 2,034 5.0 5 - 230 0.6
Euro (2019: 1.0772 / 2018:
1.0996) 1,554 3.8 22,091 54.2 121 0.3 2,429 6.5
New Zealand dollar (2019:
1.8391 / 2018: 1.8199) - - 102 0.3 - - 104 0.3
Norwegian krone (2019:
10.6082
/ 2018: 10.5910) - - 20,095 49.3 - - 5,924 15.9
US dollar (2019: 1.2063
/ 2018: 1.2525) 276 0.7 15,751 38.7 51 0.1 1,893 5.1
---------------------------- -------- ---------- --------- ---------- -------- ---------- --------- ----------
Potential gain if sterling
depreciates 1,971 4.8 60,073 147.5 177 0.4 10,580 28.4
---------------------------- -------- ---------- --------- ---------- -------- ---------- --------- ----------
Lowest value against
sterling
during the year:
Danish krone (2019: 8.9549
/ 2018: 8.6312) (22) (0.1) (319) (0.8) (14) - (613) (1.6)
Euro (2019: 1.1983 / 2018:
1.1589) (246) (0.6) (3,502) (8.6) (355) (1.0) (7,141) (19.1)
New Zealand dollar (2019:
2.0437 / 2018: 2.0370) - - (59) (0.1) - - (161) (0.4)
Norwegian krone (2019:
12.0735
/ 2018: 12.1385) - - (7,393) (18.1) - - (1,692) (4.5)
US dollar (2019: 1.3345
/ 2018: 1.4330) (20) (0.0) (1,159) (2.8) (334) (0.9) (12,469) (33.4)
---------------------------- -------- ---------- --------- ---------- -------- ---------- --------- ----------
Value at risk if sterling
appreciates (288) (0.7) (12,432) (30.4) (703) (1.9) (22,076) (59.0)
---------------------------- -------- ---------- --------- ---------- -------- ---------- --------- ----------
At 31 December 2019, the following rates were applied to convert
foreign denominated assets into sterling: Danish krone (8.8189);
euro (1.1801); New Zealand dollar (1.9636); Norwegian krone
(11.6410); and US dollar (1.3248).
Hedging
At times, HGT uses derivative financial instruments such as
forward foreign currency contracts and option contracts to manage
the currency risks associated with its underlying investment
activities. The contracts entered into by HGT are denominated in
the foreign currency of the geographic areas in which HGT has
significant exposure against its reporting currency. The contracts
are used for hedging and the fair values thereof are recorded in
the balance sheet as investments held at fair value. Unrealised
gains and losses are taken to capital reserves. At the balance
sheet date, there were no outstanding derivative financial
instruments (2018: nil).
HGT does not trade in derivatives but may hold them from time to
time to hedge specific exposures with maturities designed to match
the exposures they are hedging. It is the intention to hold both
the financial investments giving rise to the exposure and the
derivatives hedging them until maturity and therefore no net gain
or loss is expected to be realised.
Derivatives are held at fair value, which represents the
replacement cost of the instruments at the balance sheet date.
Movements in the fair value of derivatives are included in the
income statement. HGT does not adopt hedge accounting in the
financial statements.
Interest rate risk and sensitivity
HGT has exposure to interest rate movements as this may affect
the fair value of funds awaiting investment, interest receivable on
liquid assets and managed liquidity funds, and interest payable on
borrowings. HGT has little immediate direct exposure to interest
rates on its fixed assets, as the majority of the underlying
investments are fixed rate loans or equity shares that do not pay
interest. Therefore, and given that HGT has no borrowings and
maintains low cash levels, HGT's revenue return is not materially
affected by changes in interest rates.
However, funds awaiting investment have been invested in managed
liquidity funds and, as stated above, their valuation is affected
by movements in interest rates. The sensitivity of the capital
return of HGT to movements in interest rates has been based on the
UK base rate. With all other variables constant, a 0.25% decrease
in the UK base rate should increase the capital return in a full
year by about GBP360,000, with a corresponding decrease if the UK
base rate were to increase by 0.25%. In the opinion of the
Directors, the above sensitivity analyses may not be representative
of the year as a whole, since the level of exposure changes as
investments are made and realised throughout the year.
Liquidity risk
Investments in unquoted companies, which form the majority of
HGT's investments, may not be as readily realisable as investments
in quoted companies, which might result in HGT having difficulty in
meeting its obligations. Liquidity risk is currently not
significant as 18% of HGT's net assets at the year -- end are
liquid resources and, in addition, HGT has an GBP80 million multi
-- currency undrawn bank facility available. The Board gives
guidance to Hg as to the maximum amount of HGT's resources that
should be invested in any one company. For further details refer to
HGT's Investment Policy on page 13 in the full Annual Report and
Accounts.
Currency and interest rate exposure
HGT's financial assets that are subject to currency and interest
rate risk are analysed below:
2019 2018
Non -- Non --
Fixed interest Fixed interest
and floating -- and floating --
rate bearing Total Total rate bearing Total Total
GBP'000 GBP'000 GBP'000 % GBP'000 GBP'000 GBP'000 %
-------------- -------------- ---------- ----------- ------- -------------- ---------- --------- -------
Sterling 189,289 201,388 390,677 37.9% 156,525 177,523 334,048 41.5%
Euro - 247,475 247,475 23.9% - 193,686 193,686 24.0%
Norwegian
krone - 206,393 206,393 20.1% - 143,429 143,429 17.8%
US dollar - 163,075 163,075 15.8% - 115,097 115,097 14.3%
Danish krone - 22,440 22,440 2.1% - 17,076 17,076 2.1%
New Zealand
dollar - 1,508 1,508 0.2% - 2,383 2,383 0.3%
-------------- -------------- ---------- ----------- ------- -------------- ---------- --------- -------
Total 189,289 842,279 1,031,568 100.0% 156,525 649,194 805,719 100.0%
-------------- -------------- ---------- ----------- ------- -------------- ---------- --------- -------
Short -- term debtors and creditors, which are excluded, are
mostly denominated in sterling, the functional currency of HGT. The
fixed and floating rate assets consisted of cash and liquidity
funds, of which the underlying investments are a combination of
fixed and floating rate. The non -- interest -- bearing assets
represent the investments held in fund limited partnerships, net of
the provision for carried interest.
Capital management policies and procedures
HGT's capital management objectives are to ensure that it will
be able to finance its business as a going concern and to maximise
the revenue and capital return to its equity shareholders.
HGT's capital at 31 December comprised:
2019 2018
GBP'000 GBP'000
-------------------------------------------------------------------------------------------- ---------- ---------
Equity:
Equity share capital 10,186 9,331
Share premium 194,774 120,368
Capital redemption reserve 1,248 1,248
Retained earnings and other reserves 833,090 674,040
-------------------------------------------------------------------------------------------- ---------- ---------
Total capital 1,039,298 804,987
-------------------------------------------------------------------------------------------- ---------- ---------
With the assistance of Hg, the Board monitors and reviews the
broad structure of HGT's capital on an ongoing basis. This review
covers:
-- the projected level of liquid funds (including access to bank
facilities);
-- the desirability of buying back equity shares, either for
cancellation or to hold in treasury, balancing the effect (if any)
this may have on the discount at which shares in HGT are trading
against the advantages of retaining cash for investment;
-- the opportunity to raise funds by an issue of equity shares;
and
-- the extent to which revenue in excess of that which is
required to be distributed should be retained, whilst maintaining
its status under Section 1158 of the CTA 2010.
HGT's objectives, policies and processes for managing capital
are unchanged from the preceding accounting period.
20. Called -- up share capital
2019 2018
-------------------------------------
No. '000 GBP'000 No. '000 GBP'000
------------------------------------- --------- -------- --------- --------
Ordinary shares of 2.5p each:
Allotted, called-up and fully paid:
At 1 January 37,325 9,331 37,325 9,331
Sub-division of Ordinary shares 335,922 - - -
Issues of Ordinary shares 34,178 855 - -
------------------------------------- --------- -------- --------- --------
At 31 December 407,425 10,186 37,325 9,331
------------------------------------- --------- -------- --------- --------
Total called-up share capital 407,425 10,186 37,325 9,331
------------------------------------- --------- -------- --------- --------
Whilst HGT no longer has an authorised share capital, the
Directors will still be limited as to the number of shares they can
at any time allot, as the Companies Act 2006 requires that
Directors seek authority from shareholders for the allotment of new
shares.
21. Share premium account and reserves
Share Capital Capital Capital
premium redemption Reserve reserve Revenue
account reserve unrealised realised reserve
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------- --------- ------------ ------------ ---------- ---------
As at 1 January 2019 120,368 1,248 119,958 523,528 30,554
Issues of Ordinary shares 74,406 - - - -
Transfer on disposal of investments - - 350 (350) -
Gains on liquidity funds - - 489 408 -
Losses on aborted deal fees - - (219) (2,402) -
Net gain on sale of fixed - - - 24,928 -
asset investments
Net movement in unrealised - - 155,471 - -
appreciation
of fixed asset investments
Dividend paid - - - - (18,444)
Net revenue return - - - - 11,426
Net loans recovered from - - 4,679 - -
General Partners
Carried interest - - (15,775) (1,511) -
------------------------------------- --------- ------------ ------------ ---------- ---------
As at 31 December 2019 194,774 1,248 264,953 544,601 23,536
------------------------------------- --------- ------------ ------------ ---------- ---------
22. Commitment in fund partnerships and contingent
liabilities
Outstanding at 31 Dec
---------------------------------------- ---------------
Original 2019 2018
commitment GBP'000 GBP'000
Fund GBP'000
---------------------------------------- --------------- ------------------ -----------------
HGT 8 LP (1) 350,000 143,542 247,905
HGT Saturn LP (1) 150,000 69,276 92,411
HGT Transition Capital LP (1) 75,000 59,122 59,460
HGT Mercury 2 LP (1) 80,000 36,690 49,774
HGT 7 LP 200,000 19,979 5,451
HgCapital Mercury D LP (2) 60,000 3,277 3,228
HGT 6 LP (2) 285,029 2,380 3,750
HGT LP (2) 120,000 1,261 1,261
Asper RPP I LP 18,338 (3) 587 (4) 749
Hg 6 E LP (2) 15,000 118 197
Asper RPP II LP 33,895 (5) - 6,607
---------------------------------------- --------------- ------------------ -----------------
Total outstanding commitments 336,232 470,793
---------------------------------------- --------------- ------------------ -----------------
(1) HGT has the benefit of an opt -- out provision in connection
with its commitments to invest alongside Hg Genesis 8, Hg Mercury
2,
Hg Saturn, and in Transition Capital, allowing it to opt out of its
obligation to fund draw -- downs under its commitments, without penalty,
where certain conditions exist.
2 21.4% of the original GBP120 million commitment to the HgCapital
5 Fund, 5.5% of the original GBP300 million to the HgCapital 6 Fund
and 7.6% of the GBP60 million to the Mercury 1 Fund, have subsequently
been cancelled, as the Manager deemed that
it was unlikely to be required.
3 Sterling equivalent of EUR21,640,000.
4 Sterling equivalent of EUR692,000 (2018: EUR834,000).
5 Sterling equivalent of EUR40,000,000.
23. Key agreements, related party transactions and ultimate
controlling party
Key agreements, related party transactions and ultimate
controlling party
Hg acts as Manager of HGT through a management agreement and
indirectly participates through fund limited partnership agreements
as the general partners and, alongside a number of Hg's executives
(past and present), as the founder partners of the fund
partnerships in which HGT invests. In addition, Hg acts as
Administrator of HGT.
HGT has no ultimate controlling party.
HGT's related parties are its Directors. Fees paid to HGT's
board are disclosed in the Directors' Remuneration Report on page
127 in the full Annual Report and Accounts and employer's National
Insurance contributions are disclosed in Note 6(a). There are no
other identified related parties at the year -- end, and as of 6
March 2020.
24. Post balance sheet events
Since 31 December 2019, the Board has approved a further
investment commitment, totalling $400 million. This is described in
the Chairman's Statement above (and on page 11 in the full Annual
Report and Accounts).
Independent auditor's report
to the members of HgCapital Trust plc
The Company's financial statements for the year ended 31
December 2019 have been audited by Grant Thornton UK LLP. The text
of the Auditor's Report can be found on pages 101 to 105 of the
full Annual Report and Accounts.
Extract from full Annual Report and Accounts
The Directors present the Annual Report and Accounts of
HgCapital Trust plc ('HGT') (Reg. No. 1525583) for the year ended
31 December 2019.
The Corporate Governance Report forms part of the Directors
Report on pages 107 to 114 in the full Annual Report and Accounts.
Information about future developments and important events since
the year end are included in the Chairman's statement above and on
pages 10 to 12 in the full Annual Report and Accounts.
Results and dividend
The total return after taxation for the year, was GBP177,494,000
(2018: GBP101,132,000) of which the revenue return was
GBP11,426,000 (2018: revenue return of GBP13,665,000).
Following payment of an interim dividend of 1.8 pence per
Ordinary share in October 2019, the Directors recommend the payment
of a final dividend of 3 pence per Ordinary share for the year
ended 31 December 2019, making a total of 4.8 pence (2018: 4.6
pence, adjusted for the share split). Subject to the approval of
this dividend at the forthcoming Annual General Meeting ('AGM'), it
will be paid on 15 May 2020 to shareholders on the register of
members at the close of business on 20 March 2020.
Stewardship
For Hg, responsible investing means growing sustainable
businesses which are great employers and good corporate citizens,
whilst also generating superior risk adjusted returns for the
shareholders of HGT, as well as other pensioners and savers who are
invested with Hg. Hg, seeks to invest HGT's funds in businesses
that are well managed, with high standards of corporate governance.
The Directors of HGT believe this creates the proper conditions to
enhance long -- term shareholder value and to achieve a high level
of corporate performance.
The exercise of voting rights attached to HGT's underlying
investments lies with Hg. Hg has a policy of active portfolio
management and ensures that significant time and resource is
dedicated to every investment, with Hg executives and Operating
Partners typically being appointed to investee company boards, in
order to ensure the application of active, results -- orientated
corporate governance. Further information regarding the stewardship
of investee companies by Hg can be found in their review on pages
23 to 75 in the full Annual Report and Accounts.
Greenhouse gas emissions
HGT has no greenhouse gas emissions to report from the
operations of HGT, nor does it have responsibility for any other
emissions producing sources reportable under the Companies Act 2006
(Strategic Report and Directors' Report) Regulations 2013 or the
Companies (Directors' Report) and Limited Liability Partnerships
(Energy and Carbon Report) Regulations 2018. Information on our
Manager's value chain carbon footprint can be found above (or on
page 19 in the full Annual Report and Accounts), and online at
https://hgcapital.com/responsibility/.
Financial Instruments
HGT had no outstanding derivative contracts at 31 December 2019.
Note 19 to the financial statements describes the financial risk
management objectives and HGT's exposures to credit risk and
liquidity risk.
Annual General Meeting ('AGM')
The AGM of HGT, which will include a presentation by Hg, will be
held at the offices of Hg, 2 More London Riverside, London SE1 2AP
on 12 May 2020 at 11.00 a.m. Light refreshments will be available
from 10.30 a.m. Notice of the AGM is given on pages 140 to 146 in
the full Annual Report and Accounts. The Board is of the opinion
that the passing of all resolutions being put to the AGM would be
in the best interests of HGT and its shareholders. The Directors
therefore recommend that shareholders vote in favour of resolutions
1 to 16, as set out in the Notice of Meeting.
Directors' responsibility statement
in respect of the annual report and accounts
The Directors are responsible for preparing the Annual Report
and Accounts in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law, the Directors
have elected to prepare the financial statements in accordance with
United Kingdom Generally Accepted Accounting Practice (United
Kingdom Accounting Standards and applicable law) including FRS 102,
"The Financial Reporting Standard applicable in the UK and
Ireland".
Under company law the Directors must not approve the financial
statements, unless they are satisfied that they give a true and
fair view of the state of affairs of HGT and of the profit or loss
of HGT for that period. In preparing these financial statements,
the Directors are required to:
-- select suitable accounting policies and then apply them
consistently;
-- make judgements and accounting estimates that are reasonable
and prudent;
-- state whether applicable UK Accounting Standards have been
followed;
-- assess HGT's ability to continue as a going concern,
disclosing, as applicable, matters relating to going concern;
and
-- use the going concern basis of accounting unless they either
intend to liquidate HGT or to cease operations, or have no
realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain HGT's transactions
and disclose with reasonable accuracy at any time the financial
position of HGT and enable them to ensure that the financial
statements comply with the Companies Act 2006.
They are responsible for such internal control as they determine
necessary to enable the preparation of financial statements that
are free from material misstatement, whether due to fraud or error,
and have responsibility for taking such steps as are reasonably
open to them to safeguard the assets of HGT and to prevent and
detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic Report, Directors' Report,
Directors' Remuneration Report and Corporate Governance Statements
that comply with that law and those regulations.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on HGT's
website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
Responsibility statement
The Directors of HGT, whose names are shown on pages 108 to 109
in the full Annual Report and Accounts, each confirm to the best of
their knowledge:
-- the financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss
of HGT taken as a whole; and
-- the Strategic Report and Hg's Review include a fair review of
the development and performance of the business and the position of
HGT, together with a description of the principal risks and
uncertainties that it faces.
The Directors consider the Annual Report and Accounts, taken as
a whole, is fair, balanced and understandable and the information
provided to shareholders is sufficient to allow them to assess
HGT's position, performance, business model and strategy.
On behalf of the Board
Roger Mountford
Chairman
6 March 2020
Dividend
The final dividend proposed in respect of the year ended 31
December 2019 is 3 pence per share.
Ex -- dividend date (date from which shares are transferred
without dividend) 19 March 2020
Record date (last date for registering transfers to receive the
dividend) 20 March 2020
Last date for registering DRIP instructions (see below)
23 April 2020
Dividend payment date
15 May 2020
The final dividend is subject to approval of the shareholders at
the forthcoming AGM.
Directors:
Roger Mountford
Richard Brooman
Peter Dunscombe
Jim Strang
Guy Wakeley
Anne West
National Storage Mechanism
A copy of the Annual Report and Accounts will be submitted
shortly to the National Storage Mechanism ("NSM") and will be
available for inspection at the NSM, which is situated at:
www.morningstar.co.uk/uk/nsm
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR FLFFTVVIRIII
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