HgCapital Trust: April 2025 update

• Hg, the trust’s manager, has over 30 years of experience in the industry

• The trust invests in private software and service companies that are difficult for retail investors to access

• The trust has provided attractive levels of growth over the long term, although past performance is not a guide to future returns.

How it fits in a portfolio

The HgCapital Trust aims to provide investors with consistent long-term returns above those of the FTSE All-Share Index. It invests in a diversified mix of private software and services businesses across Europe and North America by investing in Hg’s three private equity portfolios.

The trust could be an option for a diversified approach to long-term growth or provide exposure to areas of the market that are difficult to access for many investors. Investors in investment trusts should be aware the trust can trade at a discount or a premium to its net asset value (NAV).

Investors should remember that investing in just a few sectors like software and services is a higher risk approach compared to a more diversified one. We think investment trusts investing in a specific sector should usually only form a small part of a well-diversified investment portfolio.

Manager

The trust’s six-strong independent board of directors, led by chairman Jim Strang, works as a team to approve all the trust’s investment decisions into the three HG funds. Strang became chairman in 2018 and has over 20 years of experience in the private equity industry both as an investor and operator. Strang was previously a strategy consultant at Bain & Company, working with Bain's Private Equity Group. He has also previously worked as a UK equities fund manager, focusing on UK growth investments and assisting in the management of several investment companies.

The three funds in which this trust invests – Mercury, Genesis and Saturn - are managed by HG’s investment committee. This committee consists of nine members led by chairman Matthew Brockman. Brockman joined Hg in 2010. He specialises in technology investments and is a board member for several of Hg’s investment companies.

Process

Hg are a private equity investor meaning they invest in privately listed companies rather than those that are publicly listed on a stock exchange. This approach can be higher risk. Their aim is to take a controlling stake in these companies and use their expertise to support management teams to help grow the company further.

Hg specialises in investing in software and service companies which can mean anything from tax & accounting firms to financial technology companies. They typically avoid the early start-up companies private equity is usually known for. Instead, the Hg team are looking for more mature companies who are often led by the founder and are demonstrating resilient and recurring revenue streams.

Once Hg takes a stake in a company it will be placed in one of Hg’s three funds. These three funds specialise in investments of different sizes. The Mercury fund focuses on investments between €100m and €500m. The Genesis fund on investments between €500m and €1bn and finally the Saturn fund on anything above €1bn. The trust will then invest in all three of these funds with the board deciding exactly how much to invest in each of them.

The three Hg funds give the trust exposure to eight different types of software and service companies. At the end of December 2024, tax & accounting was the biggest sector in the trust, accounting for 31% of the portfolio, Enterprise resource planning (ERP) and Payroll software makes up 22% of the portfolio and legal & regulatory compliance businesses make up 19% of the portfolio. These companies may be anywhere in the world but typically are located in Europe and North America. At the end of December 2024, the UK made up 32% of the portfolio, North America 28% and Scandinavia 20%.

The trust can also make co-investments. This is where the board of the trust invests directly in a specific company in the Hg trust rather than through one of Hg’s three funds. It is likely that this will be done for companies which are already owned in one of Hg’s funds, thus doubling up on exposure. Over the trust’s financial year this type of investment has risen from 5% of the trust to 9%. The trust typically targets a range of 10-15% co-investments.

Over the trust’s financial year to the end of December 2024, HG have found plenty of exciting new opportunities. They made nine investments into new companies including compliance risk management software company AuditBoard and cloud based software company CINC Systems. They also made further investments in four companies that were already known to them.

The trust also sold some investments over the year including a partial sale of their position in construction data platform company Trackunit. More recently Hg announced they have sold their entire stake in multi-asset trading and payments platform company smartTrade.

Investors should be aware that the trust can borrow money to invest with the intention of increasing returns to shareholders (known as gearing). At the end of February 2025, the gearing level was 5.6%. Gearing could magnify losses in a falling market and increases risk.

Culture

The HgCapital Trust is a FTSE 250 listed company and was established in 1989. It is managed by Hg which was founded in 1990 as Mercury Asset Management before forming part of Merrill Lynch Asset Management in the late 1990’s. In 2000 the partners created Hg, a fully independent private equity firm which remains wholly owned by its partners.

Hg is now one of the world’s leading software and services investors. They have an experienced team of around 400 employees including 240 investment professionals with offices in London, Munich, New York, Paris, San Francisco, & Singapore.

ESG integration

The Board and the Manager at Hg, continue to increase their focus on ESG and sustainability. They share a firmly held view that not only should the financial returns to shareholders be attractive, but they must be delivered in a manner which is consistent with their responsibility to society. As a technology investor, Hg understands the need to ensure that those businesses in which they invest reduce their carbon footprint and contribute to tackling climate change

Cost

The ongoing annual charge over the trust’s financial year to 31 December 2024 was 1.4%. This is lower than it was 12 months before when the ongoing charge was 1.7%. Investors should refer to the latest annual reports, accounts and Key Information Document for details of the risks and charging structure.

If held in a SIPP or ISA the HL platform charge of 0.45% (capped at £200 for a SIPP and £45 for an ISA) per annum also applies except in the HL Junior ISA, where no platform fees apply. The platform charge doesn’t apply if the trust is held in a Fund and Share Account.

Investment trusts trade like shares, so both a buy and sell instruction will be subject to the HL share dealing charges within any Hargreaves Lansdown account, except online in the HL Junior ISA.

Performance

The trust has delivered strong returns. Over the last 10 years the trust share price has grown 473.55%*. In comparison the trust’s benchmark, the FTSE All-Share, has returned 81.65%. The average trust in the AIC Private Equity sector has grown 113.93%. Over this time the trust’s Net Asset Value (NAV) has also risen 415.73%. Remember that past performance is not a guide to the future and investment trusts can trade at a premium or discount to NAV.

Over the trust’s financial year to the end of December the trust’s share price grew 25.74% compared to the FTSE All-Share which returned 9.47%. The average trust in the AIC Private equity sector grew 4.81%. Over this time the trust’s NAV also rose 10.4%.

During this period, the trust’s biggest holding, Norwegian software company Visma, was the largest contributor to returns. Visma reported strong earnings growth as well as making 33 acquisitions over 2024. German ERP and payroll company P&I also contributed strongly to performance. On the other hand, despite performing well since their initial investment in 2018, UK ERP and payroll company Access was the largest detractor in 2024.

At the time of writing the trust trades on a discount of -6.76% and over the last 12 months on average, it has traded at a discount of -3.28%. The trust’s dividend per share for 2024 (to the end of December) was 5.5p, slightly lower than the previous year when the dividend per share was 6.5p. The trust currently yields 1.11%, although yields are not an indication of future income and are not guaranteed.