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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Hg Capital Trust Plc | LSE:HGT | London | Ordinary Share | GB00BJ0LT190 | ORD 2.5P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| -0.50 | -0.10% | 488.50 | 486.50 | 489.00 | 489.00 | 485.00 | 485.00 | 386,187 | 16:35:02 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Unit Inv Tr, Closed-end Mgmt | 255.96M | 230.52M | 0.5036 | 9.68 | 2.23B |
From May 2019 to May 2024
TIDMHGT
RNS Number : 6008G
HgCapital Trust PLC
05 March 2018
HgCapital Trust plc
ANNUAL Results for the YEAR ended 31 DECEMBER 2017
London, 5 March 2018: HgCapital Trust plc ("the Company"), which provides investors with a listed vehicle to invest in unquoted businesses managed by Hg, today announces its annual results for the year ended 31 December 2017.
CONTINUED Strong NAV performance driven by double-digit revenue and profit growth AND EXITS ABOVE BOOK VALUE
SUMMARY performance
Hot Features
Premium
28 February 31 December 31 December % Total
2018 2017 2016 return(1)
=============== ============== ============== ============== ============
NAV per share GBP19.25 GBP19.32 GBP16.50 +21.5%
Share price GBP17.20 GBP17.68 GBP15.41 +19.5%
FTSE All-Share
Index +13.1%
=============================================================== ============
2017
Movement
Net Asset GBP718.5m GBP721.0m GBP615.8m +GBP105.2m
Value
=============== ============== ============== ============== ============
(1) Assuming reinvestment of all historic dividends
key Highlights FOR THE YEAR TO 31 december 2017
-- NAV per share of GBP19.32, a total return of 21.5%.
-- Share price total return of 19.5% to 31 December.
-- Strong revenue and EBITDA growth of 14% and 16% respectively across the top 20 buyout investments (83% of the portfolio) over the last twelve months.
-- Valuation multiple (EV/EBITDA) of 16.4x and debt to EBITDA ratio of 5.4x for the top 20 buyout investments.
-- GBP224 million of cash returned to the Company and GBP73 million invested on behalf of the Company (including GBP12 million as co-investment free of fees and carried interest).
-- Board's range of skills and experience enhanced by the appointment of Jim Strang (Managing Director of Hamilton Lane) and Guy Wakeley (CEO of Equiniti Group plc).
-- New commitments to invest up to GBP225 million in Hg Saturn and Hg Transition Capital over next 4-5 years, broadening the investment reach of the Company in its chosen sectors.
year to date to 28 FEBRUARY 2018
-- NAV per share of GBP19.25, primarily reflecting unrealised currency movements since year-end
-- Share price of GBP17.20.
-- Pro-forma liquid resources post completion of all announced transactions are GBP181 million (25% of NAV).
-- Pro-forma outstanding commitments, including the new commitments to Hg Transition Capital and Hg Saturn, of up to GBP667 million (93% of NAV). We expect these to be drawn down over the next four to five years.
Hg's Outlook
-- Strong trading from the businesses, combined with capital returns from exits above book value, continued to drive value for our investors
-- Following a strong year for realisations, Hg expects to see several further exits over the next six months
-- While the primary focus is currently on realisations, Hg continues to invest selectively, capitalising on situations where it has a unique angle and has developed many years' knowledge of the business, and typically building on a strong relationship with a founder or management team
-- Robust trading performance from the underlying businesses continues to underpin Hg's confidence in the quality of these investments
-- Hg's focus on operational improvement, coordinated by its dedicated Operations Innovation team, continues to drive the performance of the network of businesses, and deliver network benefits to these companies
-- This focus will continue to drive value for shareholders in HgCapital Trust plc
Roger Mountford, Chairman of the Company, commented:
"Following an excellent year for returns, the Company is well placed to realise a number of investments, while broadening our investment reach and taking advantage of new opportunities within the Manager's established area of expertise."
- Ends -
The Company's 2017 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
Roger Mountford (Chairman, +44 (0)7799
HgCapital Trust plc) 662601
Laura Dixon (Senior Investor +44 (0)20 7089
Relations Manager, Hg) 7888
Maitland
+44 (0)20 7379
Vikki Kosmalska 5151
About HgCapital Trust plc
HgCapital Trust plc is an investment company whose shares are listed on the London Stock Exchange (HGT.L). The Company 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 2017
The objective of the Company 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.
The Company provides investors with exposure to a fast-growing network of unquoted investments, primarily in technology and technology-enabled services across Europe.
References in this announcement to HgCapital Trust plc have been abbreviated to 'HgCapital Trust' or 'the Company'. Hg refers to the trading name of Hg Pooled Management Limited and HgCapital LLP. Hg Pooled Management Limited is the 'Manager'.
References in this announcement 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 announcement to pounds sterling have been abbreviated to 'sterling'.
Financial highlights
Annualised share price total return over the last 20 years: +14.8%
2017 performance:
_____________________________________________________________________________________________________
NAV per share
at 31 December 2017 was GBP19.32, a total return for the year of:
+21.5%
_____________________________________________________________________________________________________
Net assets
The total NAV of the Company at 31 December 2017 was:
GBP721m
_____________________________________________________________________________________________________
Share price
at 31 December 2017 was GBP17.68, a total return for the year of:
+19.5%
_____________________________________________________________________________________________________
Market capitalisation
The market capitalisation of the Company at 31 December 2017 was:
GBP660m
_____________________________________________________________________________________________________
Total ongoing charges
The total ongoing charges for the year to 31 December 2017:
1.5%
_____________________________________________________________________________________________________
Full-year dividend
(2016: 46p)
46p
_____________________________________________________________________________________________________
Please refer to the Director's Report in the full Annual Report and Accounts for further details of the calculation of ongoing charges.
Top 20 investments as at 31 December 2017:
_____________________________________________________________________________________________________
LTM sales growth
+14%
_____________________________________________________________________________________________________
LTM profit growth
+16%
_____________________________________________________________________________________________________
EV to EBITDA multiple
16.4x
_____________________________________________________________________________________________________
Debt to EBITDA ratio
5.4x
_____________________________________________________________________________________________________
Balance sheet analysis as at 31 December 2017:
_____________________________________________________________________________________________________
Liquid resources
(22% of NAV)
GBP160m
Liquid resources are supported by an undrawn bank facility of GBP80 million.
_____________________________________________________________________________________________________
Outstanding commitments
(62% of NAV)
GBP449m
Commitments will be drawn down over the next four to five years (2018-2023), an average cash outflow of c. GBP90 million p.a.
The Company can opt out of a new investment without penalty, should it not have the cash available to invest.
_____________________________________________________________________________________________________
Strong realisation activity throughout 2017, with further liquidity events since the year end, taking advantage of a buoyant environment for realising value at good prices.
Long-term performance record
Historic record
Revenue Revenue
Net assets return/(loss) return/(loss) Dividend
Year attributable NAV per Share available per per
ended to shareholders share price for shareholders share(1) share(2)
31 December GBP'000 p p GBP'000 p p
-------------- ----------------- -------- -------- ------------------ --------------- ----------
2008 234,094 929.4 668.5 7,445 29.6 25.0
-------------- ----------------- -------- -------- ------------------ --------------- ----------
2009 236,044 937.2 844.0 7,148 28.4 25.0
-------------- ----------------- -------- -------- ------------------ --------------- ----------
2010 347,993 1,118.8 1,006.0 10,053 34.0 28.0
-------------- ----------------- -------- -------- ------------------ --------------- ----------
2011 346,832 1,089.9 970.0 (645) (2.0) 10.0
-------------- ----------------- -------- -------- ------------------ --------------- ----------
2012 437,956 1,231.5 1,016.0 10,398 32.1 23.0
-------------- ----------------- -------- -------- ------------------ --------------- ----------
2013 440,584 1,180.4 1,010.0 12,913 35.3 29.0
-------------- ----------------- -------- -------- ------------------ --------------- ----------
2014 476,918 1,277.8 1,057.5 21,933 58.8 51.0(3)
-------------- ----------------- -------- -------- ------------------ --------------- ----------
2015 530,023 1,420.0 1,115.0 17,907 48.0 40.0
-------------- ----------------- -------- -------- ------------------ --------------- ----------
2016 615,756 1,649.7 1,541.0 20,140 54.0 46.0
-------------- ----------------- -------- -------- ------------------ --------------- ----------
2017 721,024 1,931.7 1,768.0 20,043 53.7 46.0(4)
-------------- ----------------- -------- -------- ------------------ --------------- ----------
(1) Based on weighted number of shares in issue during
the year.
(2) Dividend proposed in respect of reported financial
year, but declared and paid in the following year.
(3) Includes a special dividend of 19 pence per Ordinary
share.
(4) Proposed final dividend of 30 pence per Ordinary
share for the year ended 31 December 2017, to be
paid on 27 April 2018, subject to shareholder approval.
Interim dividend of 16 pence per Ordinary share was
paid on 27 October 2017.
------------------------------------------------------------------------------------------------------
Both the Company's share price and net asset value per share have continued to outperform the FTSE All-Share Index.
Historical total return performance
Three Five Ten Twenty
One years years years years
year % % % %
% p.a. p.a. p.a. p.a. p.a.
--------------------------------- -------- ------- ------- ------- -------
NAV per share 21.5 18.3 12.8 10.2 13.2
--------------------------------- -------- ------- ------- ------- -------
Share price 19.5 22.9 15.6 11.7 14.8
--------------------------------- -------- ------- ------- ------- -------
FTSE All-Share Index 13.1 10.1 10.3 6.3 6.3
--------------------------------- -------- ------- ------- ------- -------
NAV per share performance
relative to the FTSE All-Share
Index +8.4 +8.2 +2.5 +3.9 +6.9
--------------------------------- -------- ------- ------- ------- -------
Share price performance
relative to the FTSE All-Share
Index +6.4 +12.8 +5.3 +5.4 +8.5
--------------------------------- -------- ------- ------- ------- -------
The Board's strategic report
Chairman's statement
Following an excellent year for returns, the Company is well placed to realise a number of investments, while broadening our investment reach and taking advantage of new opportunities within the Manager's established area of expertise.
The Company continues to evolve in ways that build on our strengths and Hg's deep expertise and capability. We have today announced not only excellent results for 2017 - a total return in NAV per share of 21.5%, mostly from growth in profits - but also two new ways in which the Board will invest the Company's resources in order to broaden our business while deepening our focus on the business models that have created value for shareholders over recent years.
At the same time, we have taken steps to expand the range of expertise on our Board, in order to be able to support, advise and challenge the Manager across all our activities and in relation to the businesses we hold.
A year ago, we refreshed the contents of the Annual Report, in order to focus it more closely on the essence of the investment opportunity we offer. This year we have gone further both within this report and through our website to present the businesses we own, and the ways in which value is added: our aim is to give shareholders real insights into our strategy and a clearer understanding of how a holding in the Company fits into their portfolio. We have also redesigned this report to add further clarity to our message.
The investment opportunity
The essential message is that we offer shareholders the opportunity to share in the profitability of more than thirty carefully selected businesses, across the technology and tech-enabled service area during periods of growth that we expect to create substantial shareholder value. In aggregate, these businesses are equivalent in scale to some of the largest technology-related groups in Europe; however, our structure enables us to maintain the autonomy of each management team and to incentivise them through co-ownership of the business they manage, while still capturing the network benefits that flow from sharing intellectual property, know-how and feedback from the experiences of other companies in the Hg network.
Working with the management team of each business, the partners and executives of Hg can effect substantial change, without the constraints that often impede listed companies. In 2017, the businesses in which we hold our top 20 investments by value grew revenues by 14%, to an aggregate of GBP2.8 billion, and EBITDA by 16% to GBP738 million, achieving an aggregate EBITDA margin of 27%.
Broadening our investment
The Company's approach has been based on making, every four or five years, a commitment to invest in a "vintage" of acquisitions to be identified by the Manager, alongside limited partnership funds raised by the Manager on the same terms from major global institutional investors; we invest with them in each business pro rata to our respective commitments. The Company is thus able to invest in a far wider range of opportunities, and in much larger businesses, than its size would typically allow; we can also hold successful, growing businesses for longer, where value will continue to be created. The Company has also benefited from the much greater resources the Manager can deploy, but without bearing any responsibility to our institutional co-investors.
Following the 2016 commitment of GBP350 million to invest alongside the Hg 8 Fund, the Company made a further GBP80 million commitment in February 2017 in relation to the Hg Mercury 2 Fund. In October 2017, both of these vintages began their investment periods and have since made their first acquisitions.
In recent weeks, we have agreed with Hg that the Company will broaden its commitment to invest with Hg in two ways.
First, we have made an initial commitment of GBP75 million to invest alongside the Manager's new Saturn Fund. We will invest in businesses active in the same technology and tech-enabled activities as the Hg8 and Mercury 2 vintages, with similar business models, but which are larger in scale. The businesses in which the Hg Saturn Fund invests will typically already have an Enterprise Value of more than GBP1 billion. The Company has over recent years already invested in several companies which have grown to this larger scale, such as Visma, IRIS, Sovos and P&I. The Manager believes the competitive landscape is compelling in the large cap space, with no comparable private equity sponsor in Europe with Hg's level of credibility, knowledge or networks. Through Saturn, Hg 8 and Mercury 2, the Manager is able to target technology investments with enterprise values ranging from GBP30 million to over GBP1 billion. We expect to benefit not only from the strong organic growth in these business but also from the very broad experience and insights gained from across the market and which can be shared between established, large players and younger, disruptive businesses.
As the timing of these larger transactions will be less frequent than in our existing business, we will pay no fees on our commitment and will only pay fees once capital is invested; the terms on which we will invest are otherwise broadly similar to our current commitments and we will once again have the benefit of an opt-out, in the event that the Company does not have the funds available when a transaction occurs. Certain very large global institutional investors, who will participate alongside the Company, have also committed to provide funding in the case of the largest acquisitions in Hg Saturn. The Company will benefit from the additional firepower this will give, without taking excessive risk, and may be able to take up co-investment opportunities on which no fees or carried interest will be paid.
The Board wishes to make a further commitment of GBP75 million to this strategy, taking the aggregate commitment in Hg Saturn to GBP150 million. We will be one of the largest investors in Hg Saturn. The further GBP75 million commitment will be conditional on shareholders passing a resolution to amend the Company's Investment Policy to provide more flexibility around the size of our largest investment, by raising the limit on any one investment at acquisition from 15% to 20% of gross asset value; this proposed amendment is referenced below and also in the Notice of AGM. In practice, we anticipate that the equity investment the Company will make into each of these larger deals will be fairly similar in size to the larger investments we will make in the Hg8 vintage, so our business will remain well diversified. We expect the Saturn commitment to be invested over the next four to five years.
Secondly, the Board has committed to invest up to GBP75 million in businesses that demonstrate the same defensive growth characteristics, and in the same sectors, as under our existing business model, but in the form of Transition Capital. This approach creates new investment opportunities by addressing the needs of founders who may not be ready to give up control of their businesses but are attracted to raising some further capital as a first step to a broader liquidity event in an agreed period of time. These investment opportunities, which will be sourced by the Manager, will involve the Company taking a structured interest, usually in the form of preferred equity. We will have the benefit of contractual protections during our period of ownership and the means to force a redemption of our interest by a fixed date. In the meantime, we will be entitled to a contractual fixed return which will provide additional cover for our own dividend payments. The overall risk-adjusted return is not expected to dilute returns from our traditional buy-out investments. Hg has tracked such opportunities for some time, has a pipeline of prospective investment opportunities and has added to its team providing senior experience on these transactions. We anticipate deploying this commitment over the next three years. The terms are similar to those on our existing investments. As with the Hg Saturn commitment, we will only pay fees once capital is invested.
Composition of the Board
Mark Powell, who has served as a Director of the Company since July 2010 and as its Senior Independent Director since May 2015, has decided to retire from the Board at the forthcoming AGM. Mark has brought to the Board's discussions the experience gained during his long and distinguished career in the City, latterly as Managing Director and then Chairman of Rathbones, one of the UK's leading wealth managers. I and my Board colleagues thank him warmly for his great contribution to the Company's success.
The voice of the wealth management community, who represent the largest group of shareholders on our register, will continue to be heard thanks to Anne West, the former Chief Investment Officer of Cazenove, who joined our Board in May 2014. The Board has decided to appoint Anne as Senior Independent Director, in succession to Mark Powell, with effect from the 2018 AGM.
Every year, the Board carries out a comprehensive review of its own effectiveness. In 2017 we concluded that we should add to the range of skills and experience on the Board. Our aims were to add to our ability to work with the Manager in order to build value in our network of technology-related and tech-enabled businesses, and to be better equipped to monitor and negotiate the increasing number and types of structures through which we invest with the Manager.
We undertook a thorough search, using an experienced headhunter and a board and senior executive recruitment platform. Thanks, I believe, to the Company's very strong performance and reputation we received more than two hundred qualified applications. I am very pleased to report that the Board has appointed two new directors, Dr Guy Wakeley and Dr Jim Strang, with effect from 5 March; both Guy and Jim will offer themselves for re-election at the forthcoming AGM.
Biographical details of all the Board members are set out on pages 102-104 of the full Annual Report and Accounts. Suffice it to say here that, as a whole, the Board already embraces experience in wealth management, institutional fund management, corporate finance and financial structuring, financial management, accounting and audit. With the addition of Jim we gain deep experience of the global market for private equity investment and the structuring of private equity funds and deals; and with Guy, engineering and artificial intelligence, and the rapid development of businesses using technology to derive value from data.
More than ever, your Board will do more than monitor the Manager: we enjoy a healthy and very constructive relationship in which the Board is able to bring all its experience to bear, as the directors of a trading group would, on all the strategic and business issues relevant to the Company and the network of businesses we own in common. An example of the fruits of this relationship is in the discussions we have had with the Manager for some time on the importance of cybersecurity: an insight into this topic is set out below.
The growing impact of technology on business
In my statement last year, I suggested that businesses that do not address, and adopt, technological change are likely to go into decline: investors need to be well briefed about these opportunities and threats and to be able to identify, with confidence, which businesses understand and can exploit these changes.
Hg is well equipped to identify businesses that provide tech-enabled products or services to help their own customers exploit this mega-trend, and in so doing creating value for shareholders. Hg does not invest in early-stage businesses or unproven technology.
We have profited for several years from the shift from the sale of software packages operated in-house, to offering Software-as-a-Service ('SaaS'), using the Cloud for secure delivery, data storage, and access. A number of the businesses in our current portfolio (notably Visma, IRIS, Sovos Compliance, Mitratech, Allocate Software and Intelliflo) are already offering SaaS products and we expect this technological wave to continue to provide us with excellent returns. We also have exposure to other forms of technology-driven business. For example, QUNDIS evolved during our period of investment from a manufacturer of energy meters into offering remote, Cloud-based smart metering that will increasingly form a part of the 'Internet of Things'. CogitalGroup has been formed from the merger of established accounting services and outsourced business processing providers into an integrated services group that will increasingly adopt efficiencies from the use of technology and deliver these efficiencies to its SME customers.
The management of large outsourced databases for customers across a specific industry also offers opportunities for so-called Data Analytics businesses: our investment in Eucon, in the traditionally prosaic business of providing automotive parts pricing data and insurance claims management, offers an opportunity for mining Big Data to create business intelligence of value to customers. Evaluate, operating in the global life sciences industry, is another example of a business which can derive valuable analytics products for its customers from the data it manages.
Share price performance
The attribution analysis on page 35 of the full Annual Report and Accounts shows that increases in profits in our unrealised investments contributed GBP160 million to the overall 21.5% increase in Net Asset Value in 2017. Higher multiples of earnings contributed GBP46 million. The fast-growing companies we hold are much in demand and, accordingly, command earnings multiples above the market average. Their fundamentals provide some protection against any future correction in equity market values; and their growth rates mean that the value of these businesses can rapidly recover the impact of any fall in relevant market multiples.
The graphs on pages 8 and 118 of the Annual Report and Accounts show that the Company's shares have again outperformed the FTSE All-Share Index. The twenty-year total return has been 14.8% p.a., more than 8.5% p.a. better than the Index, while the return over five years was 15.6% p.a., beating the Index by 5.3%. These rates of return over long periods achieve our target and demonstrate the superior return that can be earned by a long-term allocation to the Company's shares.
______________________________________________________________________________________________________
"The range and scale of commitments we have made to invest with Hg over the next four to five years...reflect our confidence in Hg's well-established business model. The fact that many of the world's largest and most successful investors have made parallel commitments to the Manager's funds vindicates our view that patient, long-term investors should continue to hold an allocation to our Company in their portfolios."
Roger Mountford, Chairman, HgCapital Trust plc
______________________________________________________________________________________________________
Proposed dividend
While the Company's assets are managed to achieve long-term growth in shareholder value, the Board recognised last year that in a period of low interest rates and yields, many shareholders wish to have some certainty about likely levels of dividend payments; we said then that we anticipated total dividends in future of not less than the 46 pence per share recommended in respect of 2016. In 2017, for the first time, we paid an interim dividend (16 pence per share) and now recommend a final dividend of 30 pence per share, to make the full year dividend 46 pence in total as envisaged.
Investment activity
Hg's work with management teams, to drive value in our businesses through double-digit growth in earnings, positioned us well to crystallise that value during 2017, when market conditions appeared strongly to favour realisation. Accordingly, we realised cash totalling GBP224 million for the Company (2016: GBP135 million), compared with sums invested, at GBP73 million (2016: GBP104 million), nearly half of which was to support follow-on investments in strongly performing companies such as Visma and Sovos Compliance. Opportunities to inject additional equity into fast-growing acquisitive businesses we already own enable us to continue to deploy funds, even at times when market conditions in general favour realisations.
At the year-end, the Company had liquid resources of GBP160 million and outstanding commitments to invest some GBP449 million over the next four to five years. As I have reported above, the Board has made further commitments to invest over the coming years. If prices come under pressure in future, the Company will be well placed to move quickly to deploy these resources.
At 31 December 2017, cash and liquid funds stood at 22% of Net Asset Value; with further realisations in 2018, we should anticipate our liquidity rising further temporarily before being reinvested. I remind shareholders that the last substantial peak in our liquidity occurred in 2008, when cash and liquid funds represented just over 50% of net assets; the Company was able to take full advantage of the very fruitful conditions for investment that followed. With the new initiatives we have announced, the Company now has four routes by which to deploy its funds across a broad range of businesses within our chosen sectors.
Prospects
The Manager's outlook is set out below. They remain confident that our current portfolio will continue to report strong growth in revenues and profits and that the defensive characteristics inherent in the businesses we hold will protect value, even if macro-economic conditions become more unpredictable. The focus on specific business models will continue to identify businesses with similar characteristics that offer protection against market forces.
Most of the businesses in which we are invested continue to deliver strong revenue growth, improving margins and impressive increases in profitability. This bodes well for continuing value creation and our capacity to defend valuations despite weak equity markets.
The range and scale of commitments we have made to invest with Hg over the next four to five years, combined with their pipeline and ability to identify and track businesses with potential, reflect our confidence in Hg's well-established business model and in the new opportunities from which shareholders can profit. The fact that many of the world's largest and most successful institutional investors have made parallel commitments to the Manager's funds vindicates our view that patient, long-term investors should continue to hold an allocation to our Company in their portfolios.
Roger Mountford
Chairman
2 March 2018
Investment objective and investment policy
The objective of the Company 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.
During the year, the Board, with the assistance of the Manager, has reviewed the Investment Policy and is submitting an amended Investment Policy for approval by shareholders at the 2018 AGM. The only amendment is that, on investment, the maximum allowable investment in a single business is increased to 20%, compared to 15% in the current policy. The Board believes that this change will align the Company with its peers and provide the Manager with additional flexibility to achieve the Company's Investment Objective. A blacklined version of the Investment Policy showing all changes proposed is included at the end of the Notice of Meeting, on page 137 of the full Annual Report and Accounts. Below is the Investment Policy in force for the year ending 31 December 2017.
Investment policy
The policy of the Company is to invest, directly or indirectly, in a portfolio of unlisted companies where Hg believes it can add value through organic growth, operational improvements, margin expansion, reorganisation or by acquisition to achieve scale. The Company seeks to maximise its opportunities and reduce investment risk by holding a spread of businesses diversified by sector, market and geography.
Risk management
The Company has adopted formal policies to control risk arising through excessive leverage or concentration. The Company's maximum exposure to unlisted investments is 100% of the gross assets of the Company from time to time. On investment, no investment in a single business will exceed a maximum of 15% of gross assets. The Company 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 the Company'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.
The Company may, from time to time, invest directly in private equity funds managed by Hg where it is more economical and practical so to do.
Gearing
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. The Company 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.
The Company has the power to borrow and to charge its assets as security. The Articles restrict the Company's ability (without shareholder approval) to borrow, to no more than twice the Company's share capital and reserves, allowing for the deduction of debit balances on any reserves.
Hedging
Part of the Company's portfolio is located outside the UK, predominantly in Northern Europe, and a further part in businesses that operate in US dollars. The Company may therefore hold investments valued in currencies other than sterling. From time to time, the Company 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.
Overcommitment
The Company may be overcommitted at times in order to ensure that it is more fully invested in the future. The level of overcommitment is regularly reviewed by the Board and Hg.
Liquid funds
The Company 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 the investment-realisation cycle the Company may hold substantial cash awaiting investment. The Company 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 the Company's investment objective and policy will be made only with the approval of shareholders in a general meeting.
Performance targets
The Company'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.
In the twelve months to 31 December 2017, the Company's NAV per share increased by 21.5% on a total return basis. In comparison, the FTSE All-Share Index increased by 13.1%. The twelve month total return of the Company's share price was 19.5%.
NAV per share has grown by 10% p.a. compound over the last ten years and 13% p.a. compound over the last twenty years. The share price has seen broadly similar performance growing by 12% p.a. compound over the last ten years and 15% 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.
The Company is not managed so as to reflect short-term movements in any Index. The Board also regularly compares the Company's NAV and share price performance against a basket of broadly comparable companies with similar characteristics, listed on the London Stock Exchange.
Going concern
The Company'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 the Hg's Review. The financial position of the Company, its cash flows, liquidity and borrowing facilities are described in the Strategic Report.
In addition, note 19 to the financial statements describes the Company'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 the Company 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 the Company will have adequate resources to continue in operational existence for at least the next twelve-month period from the date of this report and be able to meet its outstanding commitments. Accordingly, they continue to adopt the going concern basis in preparing these results.
Long-term viability statement
In accordance with provision C.2.2 of the 2016 revision of the UK Corporate Governance Code, the Directors have assessed the prospects of the Company 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 the Company's viability may vary from year to year, depending on a number of factors, notably its outstanding investment commitments, which currently run until 2021-2022. In addition, the Board believes that it should assess the viability of the Company over a minimum of five years and, accordingly, has elected this year to assess the Company's viability over the five-year period ending December 2022.
In their assessment, the Directors have considered the Company's position with reference to the business model, the balance sheet, cash flow projections, availability of funding and the Company's contractual commitments. This has been undertaken alongside a detailed review of the principal risks and uncertainties associated with the Company, including: performance; regulatory; operational; financial; liquidity; and borrowing, as detailed on page 17 of the Strategic Report of the full Annual Report and Accounts. The Directors recognise the importance of its close working relationship with the Manager and regularly monitor and review Hg's strategy, resources, risks and associated internal controls.
Based on this assessment, the Directors of the Company confirm that they expect the Company will continue to operate and meet its liabilities, as they fall due, during the five years ending December 2022.
Principal risks and uncertainties
During the period under review, the Board has carried out a robust assessment of the principal risks, and controls, facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. This process involves the maintenance of a risk register, which identifies the risks facing the Company and assesses each risk on scale, classifying the likelihood of the risk and the potential impact of each risk to the Company.
The Board has established controls to mitigate against risk faced by the Company. The Audit Committee has delegated authority to regularly review these policies for managing each risk, as summarised below.
Performance
An inappropriate investment strategy might lead to poor performance. The Board is responsible for deciding the Investment Policy to fulfil the Company's objectives and for monitoring the Manager's performance in carrying it out. To help manage this risk, the Manager provides an explanation of all investment decisions and the rationale for their selection of sectors and businesses. It also monitors and maintains an adequate spread of investments, within the risk controls set out in the Company's Investment Policy, in order to manage the risks associated with particular countries or factors specific to particular sectors.
Liquidity
The Company predominantly invests in unquoted companies; liquidity in their securities can be constrained, potentially making the investments difficult to realise at, or near, the Directors' published valuation at any one point in time. The Manager has regard to the liquidity of the portfolio when making investment decisions, and the Company manages its liquid resources to ensure sufficient cash is available to meet its contractual commitments.
In the event that, after providing for necessary expenditure, the Company will have insufficient cash resources to fund a new investment, an opt-out provision has been negotiated in connection with the Company's commitment to invest alongside Hg 8, Mercury 2, Saturn and in Transition Capital. This permits the Company to opt out of its obligation to fund a draw-down for certain liquidity or regulatory reasons, in particular, if to do so would result in the Company (i) not having the cash resources to meet any of its liabilities, expenses or obligations to fund its commitments to other funds or investment vehicles of Hg that are reasonably likely to become due within 12 months or (ii) not being able to undertake any share buy-back, in each case subject to certain conditions. These provisions help the Company to manage the risks associated with over-commitment.
At certain points in the investment cycle, the Company may hold substantial amounts of cash awaiting investment, which it may invest in government or corporate securities, or in bank deposits or managed funds. To this end, the Company is invested in Royal London Asset Management Cash Funds. This deploys funds awaiting investment in a highly liquid portfolio of cash, deposits, money market instruments and short-dated government securities.
Borrowing
The Board and the Manager agree that prudent use of borrowing to fund investments can allow the Company to hold a larger and more diversified portfolio and increase rates of return to shareholders. Hg acquires businesses with the benefit of bank borrowing at levels that can be serviced from the cash flows generated within that business. The Board does not currently see any advantage in using a further level of long-term borrowing by the Company, as this would add risk without any certainty of enhancing returns, but anticipates making tactical use of bank borrowing from time to time, in order to remain more fully invested across the investment-realisation cycle.
The Board keeps the management of the Company's resources under frequent review and regularly considers long-term cash flow projections for the Company.
The Company has arranged an unsecured standby facility with Lloyds Bank plc of GBP80 million to provide funds for investment when necessary; this is available until 30 June 2019. The facility was not utilised during the year and remained undrawn at 31 December 2017. The Directors believe the borrowing facility gives the Board further flexibility in managing the Company's resources, without adding undue risk.
Operational
The Company has no employees and relies upon the services provided by third parties, notably Hg to which the principal managerial functions have been delegated. The Company is dependent upon the internal control systems of the Manager and the Company's other service providers. The security of the Company's assets, dealing procedures, accounting records and maintenance of regulatory and legal requirements, depend on the effective operation of these systems. These are regularly tested and monitored and an internal control report, which includes a robust assessment of risks, together with procedures to mitigate such risks, is prepared by the Manager and reviewed by the Board and the Audit and Valuation Committee twice each year.
The Company is also an Alternative Investment Fund ('AIF') for the purposes of the Alternative Investment Fund Managers Directive (Directive 2011/61/EU) ('AIFMD') and Hg Pooled Management Limited has been appointed as its Alternative Investment Fund Manager ('AIFM') for the purposes of the AIFMD.
The Board has considered an Assurance Report on Internal Controls (AAF 01/06) as prepared by the Manager, and independently reviewed by Deloitte LLP, for the year ended 31 December 2016. The Board will consider the 2017 Assurance Report when issued later in the year.
Regulatory
The Board continues to believe that it is in shareholders' interest to retain the tax advantages that flow from meeting the requirements for an investment trust under Sections 1158 and 1159 of the Corporation Tax Act 2010 ('CTA'). As such, the Company is exempt from corporation tax on capital gains realised from the sale of its investments, so the impact of losing investment trust status would be significant. The Board believes the likelihood of this risk occurring is low. The Manager monitors investment movements, the level and type of forecast income and expenditure, and the amount of retained income (if any) to ensure that the provisions of Sections 1158 and 1159 of CTA are not breached. The Company's compliance with the conditions for retaining investment trust status is certified by the Manager at each meeting of the Board.
General changes in legislation, regulation or government policy could significantly influence the decisions of investors or impact upon the markets in which the Company invests.
Financial
The Company's investment activities expose it to a variety of financial risks that include valuation risk, liquidity risk, market price risk, credit risk, foreign exchange risk and interest rate risk. Further details are disclosed in note 19 to the financial statements, together with a summary of the policies for managing these risks.
Other matters
Socially responsible investment
The Board has endorsed Hg's policy to invest the Company's funds in a socially responsible manner, as set out below and on their website at http://www.hgcapital.com/responsibility. The Company'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.
The Company has no employees and has limited direct impact on the environment. The Company 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 the Company as it has no employees, all of the Directors are non-executive and it has outsourced all its functions to third party providers. The Company has therefore not reported further in respect of these provisions.
Modern Slavery
The Company 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 http://www.hgcapital.com/hgcapital-slavery-and-human-trafficking-statement.
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 the Company's leadership are described on pages 102 and 104 of 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, but to do so solely on merit. At the end of the year under review, the Board of Directors of the Company comprised four men and one woman. The Company seeks to enhance diversity and looks for the best qualified male and female candidates. The Manager has an equal opportunities policy and currently employs 78 men and 50 women.
For and on behalf of the Board
Roger Mountford
Chairman of the Board
2 March 2018
Hg's review
Building businesses that change how we all do business
Hg is an investor predominantly in unquoted technology and technology-enabled service businesses.
Our business model combines deep sector specialisation with dedicated portfolio management support. Hg invests primarily in growth companies in expanding sectors via leveraged buyouts across Europe.
Hg's vision is to be the most sought after private equity investor in Europe, being a partner of choice for management teams, so as to produce consistent, superior returns for the Company and other clients and a rewarding environment for our staff.
References in this Annual Report and Accounts to the 'portfolio', 'investments', 'companies' or 'businesses', refer to a number of buyout investments, held as:
-- indirect investments by the Company 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') and HGT Mercury 2 LP) of which the Company is the sole limited partner;
-- a secondary purchase of a direct interest in Hg's 6 fund through HgCapital 6 E LP ('Hg 6E'), in which the Company 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 the Company 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 120 to 122 of the full Annual Report and Accounts.
Overview
Introduction to Hg
With close to 130 staff in investment offices in the UK and Germany, Hg has funds under management of over GBP9 billion serving a range of highly regarded institutional investors, including private and public pension funds, charitable endowments, insurance companies and family offices, alongside the Company. We have progressively invested in and strengthened the business of Hg over the years, to establish a significant competitive advantage.
The Company is the largest client of Hg, which has been contracted to manage the Company's assets since 1994.
The Company offers investors a liquid investment vehicle, through which they can obtain an exposure to Hg's diversified network of private equity investments with minimal administrative burdens, no long-term lock-up or minimum size of investment, and with the benefit of an independent board and associated corporate governance.
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"We focus our investments in software and tech-enabled service & industrial companies with specific business characteristics that we believe have the ability to grow across market cycles and are attractive to future buyers."
Nic Humphries, Senior Partner, Hg
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Investment strategy
Hg primarily focuses on buyouts in technology and tech-enabled businesses focused on end-market clusters with enterprise values ('EV') of more than GBP30 million to GBP3 billion predominantly, but not exclusively, in the UK and Northern Europe.
These companies are small enough to provide opportunities for strategic and operational improvement and to offer multiple exit options across market cycles, but with the scale and potential to attract high quality management.
We believe these markets offer a high volume of investment opportunities with proven financial performance and strong market positions.
Clear investment criteria
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.
We seek companies predominantly in technology and technology-enabled services that share similar characteristics, such as: high levels of recurring or contracted revenues; a product or service that is business critical but typically low spend; low customer concentration; high customer loyalty and low sensitivity to market cycles; and often providing a platform for merger and acquisition ('M&A') opportunities. We believe that these companies have the potential for significant performance improvement.
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"Our differentiation is how focused we can be on a few high impact areas that are relevant to all our tech and services companies. The OI team members are experts in their areas, and they work the same topics over and over again from one company to the next."
Amanda Good, Partner, Hg
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Active management of businesses in our network
By virtue of the fact that Hg repeatedly invests in specific business models, our dedicated Operations Innovation ('OI') Team has been able to tailor a differentiated approach to driving value creation during our ownership. Following each investment, our OI Team works with management to focus on a set of operational levers that are key to performance in an Hg 'sweet spot' business model: sales, digital marketing, pricing, customer success, IT and data analytics. For each of these levers, the OI team has codified the Hg experience and best-practices into set 'plays' that are deployed together with management.
The nature of support provided by Hg can take a variety of forms. At a Board level, we often appoint a member of the OI team as a non-executive director responsible for applying active, results-oriented corporate governance.
Beyond the boardroom, members of our OI team provide either direct support through hands-on best-practice project work, or collaborate with management teams to draw on expertise from our proprietary network of specialists and Operating Partners, who each bring a specific, operational specialism to company situations.
One of the most powerful ways the OI team motivates change is through peer-to-peer collaboration. Over the first few months of 2018, for example, 27 M&A executives, 62 CTOs/CIOs and 130 Sales & Marketing leaders will have spent up to two days together essentially sharing and adopting each other's best practices. By way of example, across these Hg Forums: Visma will explain how to build in-house capabilities to complete and integrate 20 acquisitions a year; Allocate will explain to the CTOs how to transition from on-premise to cloud software in less than a year; and Sovos will help sales leaders understand what systems and processes are required to generate $10 million in sales leads in a month.
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"The speakers, the location, the entertainment and most of all, the peers I met at the Hg CEO & Chairman forum, were all first class. They made me feel inspired, excited, pleased and reassured to be backed by Hg."
Geoff Love, Chief Executive Officer of Esendex Group
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Insight
Managing the cybersecurity risk
Businesses are facing an ever-increasing threat to their operations and finances through more frequent, sophisticated and targeted cyber attacks.
These attacks can impair business operations, generating a reduction in productivity and lost opportunity costs. They can also generate direct economic loss (via fines, ransom and fraudulent payments) and reputational damage. In the world of private equity this reputational impact can extend to the fund manager and is a direct threat to shareholder value.
However, it is possible to protect the investment and shareholder value of each company and, in doing so, demonstrate a well-managed business, potentially creating additional value at realisation.
We are very fortunate to have Jason Richards, a very well respected former Chief Information Officer, working directly with the OI team. Over the last year, Jason has created and implemented a standardised 'end to end' cybersecurity assessment for all the businesses in Hg's network, employing industry best-practice frameworks and standards across non-technical (for example, risk management and education) and technical control areas (for example, network protection).
Attaching an overall Cybersecurity Maturity Score to each company provided an effective means to monitor and measure progress within each company and across the network. It also enabled us to benchmark each company against each other.
These insights have assisted us in targeting areas for improvement which have been supported in a number of different ways. For example:
-- Organisations that were identified as having an opportunity to improve their management of cybersecurity risk, were provided a predefined 'jump-start' risk register and supporting instructions on how to define and quantify their cybersecurity risks.
-- For businesses that find themselves under cybersecurity attack, or suspect they have been attacked, being able to call upon an external emergency incident response provider can be critical in fighting off the attack and/or determining the extent of the breach. We removed any friction associated with acquiring these services by negotiating establishing an agreement with a world class partner, available to all our businesses.
While we are by no means ready to declare victory in the ever-changing landscape of security risks, our businesses have taken a huge leap forward in terms of understanding and readiness for what lies ahead.
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"The threat of cybersecurity impact to any business, regardless of size, is very real and is only increasing as we continue to be more reliant upon online services and as the volume and nature of connected devices continues to grow. Protecting yourself and your business does not need to be a complex task. However you do need to commit to, deploy and maintain effective levels of cybersecurity practices, policies and procedures, alongside layered technology solutions. Critically, an effective understanding of cybersecurity from the board room to every employee, is a cornerstone of any successful defence. Cybersecurity is the responsibility of every employee, not just that of the IT team."
Jason Richards, Operating Partner, Hg
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"A deep bench of colleagues, all working to target specific themes, not only allows us to invest in some great businesses but also to work with some of the most talented executives active in those sectors globally"
Matthew Brockman, Managing Partner, Hg
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Our people
Hg succeeds through the analysis and understanding of new and emerging dynamics in the sectors and market clusters in which it invests. This requires profound knowledge of technology, markets and business practices. To this end, we employ exceptionally talented teams to identify and execute investment opportunities and accelerate value realisation during our ownership.
This specialisation - both in investment selection and portfolio management - requires significant resources and we have built a business employing close to 130 staff, including over 75 investment and other professionals.
Our people come from a range of backgrounds and experience including private equity, consulting, investment banking, accounting and industry specialists. Supporting these in-house resources, Hg's Operating Partners consist of a group of senior individuals with many years of experience in operational and strategic roles, as well as individuals with strong functional expertise in a variety of areas. In addition to this, they have all worked with Hg and other private equity firms over long periods.
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 ten European countries and the USA. Our partners have, on average, nineteen 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 vibrant culture, allows us to attract and hire the best talent in our industry.
We place a strong emphasis on delivering an experience that will encourage the best candidates to join us.
Improving our ability to identify talent
We have strengthened our talent identification processes on how we can best accelerate the development of our top performers within the business. We believe that this is the basis of effective succession planning.
Employee engagement
Our people are highly motivated by, and committed to, delivering outstanding value to the Company, 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 review and compensation structures. Hg works hard to ensure our employees are engaged and we strive to improve levels of engagement, using independent external benchmarks.
Developing future leaders
We are explicit about the behaviours we wish to encourage at Hg and have aligned training, coaching, performance feedback and incentives to our values. This focus includes both broad organisation-wide and leadership competency models, which are used as the basis for performance coaching, development and promotion.
A full description of Hg and our key staff is available at www.hgcapital.com
Sector specialisation
Deep sector focus
In order to find businesses where we can add substantial value, Hg applies a deep sector focus, predominantly targeting buyout investments in technology and technology-enabled service companies.
Hg's sector teams combine the domain knowledge and expertise of a trade buyer - giving them enhanced credibility and the ability to make confident decisions - with the speed of execution and discipline of a financial investor leading to high conversion rates on deals.
This deep sector focus is channelled through a rigorous, research-based investment process; systematically identifying the most attractive growth sub-sectors and business models primarily in Europe; and through repeated investment in them, our deal flow is optimised and our returns improved.
Technology
Technology covers a broad range of markets. Driven by our deep sector approach, Hg's Technology teams focus on specific sub-sectors, including: vertical market application software - particularly delivered via a Software as a Service ('SaaS') model; private electronic marketplaces; B2B media information/publishing; and datacentre operators.
Within these sub-sectors, we have invested in high quality businesses with diverse customer bases, which feature subscription-based business models generating predictable revenues and cash flows. The team regularly conducts top-down research within the wider sector, in order to continue to identify and assess further repeatable investment themes where we can invest time to develop proprietary expertise.
Our highly resourced, dedicated team means that we are well placed to identify, assess and complete investments quickly and thoroughly. We work to bring our experience and expertise to support management teams, aiming to have the knowledge of a trade buyer, coupled with the speed and focused delivery of a financial buyer. The team benefits from the depth and breadth of many years of private equity experience in technology, and is complemented by an extensive network of industry experts and advisers.
Given the breadth of opportunity in European technology, Hg is currently investing in the sector on behalf of the Company and from two funds, Hg 8 and Hg Mercury 2; targeting buyouts in companies with typical enterprise values of over GBP30 million and up to GBP1 billion.
Hg Saturn will also invest in this sector in businesses which have already reached significant scale; typically with enterprise values of over GBP1 billion.
In aggregate, the funds we have to invest across the sector allows us to field significant teams to identify and negotiate investments, while providing a very comprehensive resource for the management teams that we support.
Services
Our investment in Services focuses on companies which provide business-critical services with high levels of intellectual property, large fragmented customer bases, preferably with a repeat or recurrent model and often with an increasing degree of technology enablement. The Services sector is a large and wide-ranging segment which is traditionally split into 'horizontal' business models such as: business process outsourcing, facilities management, or testing and inspection. In contrast, our investment approach concentrates much more on specific end markets and sub-segments, which we believe lead to attractive business model characteristics. We have then invested time to develop a strong understanding of the industry dynamics through identifying service companies that sell into those specific sub-sectors.
We target businesses with leading positions within a niche, typically reflected by strong margins; and we aim to grow and scale these businesses, either organically within existing markets, or through acquisition.
Existing investments include companies that serve a range of industries such as: the leasing and maintenance of business-critical equipment, employment law and health & safety; book-keeping and payroll services; international business expansion services; and insurance distribution. In all of these companies, the improved delivery of service via technology is an important theme.
Industrial technology
Our industrial technology investing is focused on growth businesses in particular in the DACH market, which is characterised by a large number of highly successful, family-owned businesses (the "Mittelstand").
We have earned a reputation as a preferred partner for many of these Mittelstand companies to scale into international businesses.
The Industrial Technology Team, based in Munich, is located in the heart of an economic zone containing numerous high quality, cutting edge, technology-led industrial businesses, many of which have strong national or international positions in a specific niche sector, but
with the opportunity to achieve further scale. Our thematic research within this sector has been concentrated over many years on the characteristics that define a strong industrial technology investment.
As a result, we have developed certain themes and business models that we regard as particularly attractive: aftermarket companies; product champions/niche manufacturers with tech-enabled and mission-critical products; and smart distribution models. These themes are overlaid with specific industrial sub sectors where we have a strong understanding.
Case study - Sequel
Supporting management in delivering organic growth, recurring revenue transition and product expansion
www.sequel.com Sector: Technology Geography: UK
About Sequel Business Solutions
Sequel Business Solutions ('Sequel') is a leading provider of software and services to the Lloyd's of London and the broader insurance markets, headquartered in London with operations in UK and Spain. The company was founded in 1993 and has since grown to become one of the leading insurance software specialists in the UK. Sequel has an attractive customer base, comprising some of the leading, most highly respected companies in the commercial insurance space, which rely on Sequel's core underwriting platform, Eclipse, to run and optimise their operations.
Additionally, the company also provides innovative software solutions for related work streams such as: risk analytics (Sequel Impact); claims processing (Sequel Claims); reinsurance (Sequel Re); and placement (Sequel Origin).
Why did we invest in Sequel?
Hg identified Sequel through origination work within the insurance software segment. As the Hg team was searching for an attractive entry point into insurance technology, Lloyd's and complex insurance segments were identified as particularly attractive niches, within which we identified Sequel as having a strong position, as evidenced by stable relationships with key customers (such as Willis, Brit and Markel) which are seen as technology leaders in the Lloyd's and broader commercial insurance market.
Sequel's core technology offering was of very high quality and, when combined with a strong reputation for service delivery, commanded a premium position.
In addition, innovative new products such as Impact, Claims, Re and Origin were in early commercial stages and could provide significant upside.
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"I would like to thank Hg for being a great partner as we developed Sequel into the leading provider of software to the complex insurance market. Together, we transformed the business."
Mario Garcia, CEO of Sequel
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The investment process
Hg partnered with the management of Sequel, led by CEO, Mario Garcia, in July 2014, and supported his team in the transition of ownership from the founder, as well as helping to execute their strategy to become a clear leader in Lloyd's and build a strong product focused business.
How did we support them and create value?
Sequel has been transformed under Hg's ownership period. Its core Eclipse product set was broadened to a full suite supporting all the complex risk activities of insurers and brokers, including risk aggregation, claims management and re-insurance. The suite was also separated into modular products: for risk (Sequel Impact); claims (Sequel Claims); re-insurance (Sequel Re); and origination (Sequel Origin), allowing more light touch sales and implementations.
The modular product set, combined with a greater commercial focus (including building a professional sales organisation), led to a tripling of customer numbers.
In parallel, Sequel's business model rapidly grew its recurring revenue.
In combination, this allowed Sequel both to grow total revenue by 13% p.a. since initial investment, while doubling the recurring revenue share to nearly two thirds during our ownership.
What was the exit?
Confirming Sequel's highly strategic position in the Lloyd's and complex risk insurance market segments, Hg was approached by Verisk, a listed US data analytics business, in the Summer of 2017. Verisk was looking to gain a footprint in the UK insurance technology market and to access the complex risk insurance segment. The Company received GBP20 million, at an uplift to the December 2016 book value of 161% and delivered a 5.1x investment multiple and a 77% gross IRR over the investment period.
5.1x Investment return multiple of cost
77% p.a. Gross IRR
Case study - QUNDIS
Establishing a clear technology leader
www.qundis.com Sector: Industrial Technology Geography: Germany
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"QUNDIS and Hg have worked very well together over the last five years taking the company to the next level and increasing its breadth. We very much look forward to working within the new partnership, as we see multiple opportunities for further improving our solution offering."
Dieter Berndt, CEO at QUNDIS
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About QUNDIS
Headquartered in Germany, QUNDIS was created in 2008 from the merger of QVEDIS (previously part of Siemens) and KUNDO SystemTechnik and currently has more than 250 employees. QUNDIS supplies a full data management solution for the housing and utilities industries to collect, measure, and transmit consumption-dependent data for heating and water usage on an apartment unit level. This solution comprises a comprehensive range of sub-metering devices as well as remote data transmission technology including a cloud solution and data management software, serving the SME independent sub-metering supplier and building technology markets across Europe. QUNDIS' products are sold in over 30 countries, with the largest markets being Germany and Italy.
Why did we invest in QUNDIS?
QUNDIS has a robust business model with a proven track record of growth and recession resilience, having delivered 7% revenue CAGR over the period of our ownership from 2012 to 2017. It benefits from a large installed base that generates a recurring and predictable revenue stream with loyal customers driven by the low spend nature of the product.
A significant proportion of sales are replacement-related, also driven by regular upgrades to more advanced read-out solutions. New installations are increasing, due to more rigorous energy efficiency regulations across Europe, leading to the ability for further value creation potential via international expansion in adjacent countries. The business has a high quality, competent management team who re-invested a significant amount as part of the original transaction.
The investment process
Hg initially partnered with QUNDIS in May 2012, representing a continuation of Hg's sector-driven investment strategy, seeking to partner with market-leading industry champions. Hg had been tracking the company prior to a sales process being launched at the end of 2011 and the Munich team had built a strong relationship with the QUNDIS management, enabling them to engage early in the sales process.
How did Hg support them and create value?
Key value drivers during Hg's investment period have been the consolidation of QUNDIS' production facilities into a single new state-of-the-art site in 2013, and importantly the development of a highly-advanced gateway and software solutions to offer a comprehensive, market-leading remote read-out solution. Through its technological leadership and reputation as quality leader, QUNDIS has been able to develop further into new customer segments and service offerings on a truly European scale.
QUNDIS' growth also continues to benefit from broader market fundamentals such as the mandatory actual consumption-based billing (under the European Energy Directive), which Hg identified as a driver when the initial investment was made. Overall, QUNDIS is a great example of tech-enablement transforming a business.
Performance improvement
Since 2012, QUNDIS has broadened its customer base in the core markets of Germany and Italy and has built strong platforms to exploit the growing markets in France and other European countries. QUNDIS has established itself as a clear technology leader, providing some of the most advanced read-out solutions in the industry. We anticipate the enforcement of the European Energy Directive (mandatory installation of smart meters and likely move towards intra-year billing) will contribute to sustained growth rates going forward. In addition, under Hg ownership QUNDIS transitioned into a full solution provider including cloud based data management and read-out software.
As a result, QUNDIS delivered annual sales growth of 7% and annual EBITDA growth of over 15% during our ownership.
What was the exit?
Following QUNDIS' rapid growth and international expansion Hg agreed to the sale of the majority of the company in April 2017 and is looking forward to participating in the next development phase of QUNDIS in combination with the Kalorimeta Group of companies. This transaction totalled GBP44 million at an uplift to the December 2016 book value of 29%, and delivered a 3.5x investment multiple and a 29% gross IRR over the investment period.
3.5x Investment return multiple of cost
29% p.a. Gross IRR
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 Investing ('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 who are invested with us.
Across all our investments we look to create quality employment in sectors with low carbon emissions and to add value through revenue growth over the long-term. We want the businesses we invest in to be genuinely focussed 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.
As part of our RI approach, we take an active interest in how our companies manage environmental, social, and governance ('ESG') issues. We encourage, support and stretch the companies we work with to strive for best practice responsible business standards.
Our responsible investing journey
Hg has been a signatory of the UN Principles for Responsible Investment ('UNPRI') since 2012 and since then we have continued to increase our ambitions and ESG commitments. In 2017, we hired our first full time executive dedicated to drive our commitment to responsible investing. As part of this we reviewed and updated our RI framework, policy and approach to set our ambition and ensure we focus on the ESG opportunities and issues most relevant for the types of businesses we invest in. Our new Responsible Business framework forms the foundation of our work moving forward.
A signatory to the UNPRI since 2012.
How we integrate Responsible Investing into our investment process
Investment screening
-- When considering potential new investments, we screen them against our exclusion list, which outlines the sectors, businesses and activities in which we will not invest.
-- A red flag report identifies high level concerns arising from sectors, geographies and preliminary diligence results.
Due Diligence
-- 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.
Ownership
-- We take an active approach to managing ESG during our ownership. This starts with an ESG onboarding and maturity assessment within the first months of acquisition to prioritise ESG topics and agree an action plan.
-- In 2018, we are conducting a maturity assessment of our existing portfolio to identify areas for improvement where Hg can support the companies to realise their ambitions within and beyond our Responsible Business framework.
This assessment will be updated at least annually.
-- We organise face-to-face events for our management teams to share best practice, network and receive support.
Realisation
-- Upon realisation, we aim to articulate the increased value from improved ESG performance with case studies and performance metrics.
Our responsible business framework
Hg's Responsible Business framework outlines key ESG areas of focus and how Hg can support our businesses.
The framework is used to assess prospects both before investment and businesses we own throughout our ownership. It focuses on three key areas:
Essentials
There are certain minimum ESG requirements that Hg expects from all our businesses. These include:
-- Governance and Business Integrity, such as code of conduct, appropriate controls, board composition and appropriate health & safety and grievance procedures.
-- Risk and Compliance, including compliance with all laws and regulations, active risk management, as well as standards and policies to combat bribery, corruption, money laundering and other malpractice.
-- Data and Cybersecurity, which includes Hg's minimum standards for cybersecurity 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 employees is vital for growth and business success. We look at employees from four aspects:
-- Diversity of talent and equal opportunities irrespective of ethnicity, gender, disability and background.
-- Engagement and motivation by promoting transparent communications, health and wellbeing, learning opportunities, recognition and good leadership.
-- Grow businesses and talent, including organic job growth, healthy staff turnover, talent management and succession planning.
-- Purpose and culture, including appropriate and value driving vision, mission, values, norms and behaviours.
Society
We want all our businesses to strive for positive external impact by acting transparently and contributing to society through their business practice, charitable and community support and supplier and customer relations. Our businesses contribute to society in a number of ways:
-- Community engagement including community engagement initiatives, apprenticeships, charitable giving and volunteering.
-- Environmental impact - The majority of our businesses have low carbon footprints and minimal impact on the environment. We still encourage them to consider how they can improve their energy use and waste management, as well as reduce business travel.
-- Positive relationships with key external stakeholders including customers and suppliers: for example, by responsible pricing and sales and supplier relationships.
-- Transparency of company commitments and progress, including external reporting and sustainability communications.
Responsible investing case studies - Employee engagement
The types of business we invest in are people-centric: they do not operate heavy equipment or run substantial manufacturing sites. The employees are therefore the most important asset across our businesses. Numerous studies show that there is a correlation between employee satisfaction and productivity, profitability and customer loyalty, and that an engaged workforce contributes to a safer, more efficient workplace with lower staff turnover.
Many of our portfolio companies are demonstrating best practice in building an engaged and diverse workforce; here are a few examples:
Citation
Citation provides professional regulatory-driven compliance services to nearly 20,000 clients across a range of specialist areas, including: human resources and employment law; health and safety; ISO accreditation; and staff training. The Company is headquartered in Cheshire and employs over 400 professionals. Citation has been listed in the Sunday Times' UK Top 100 Best Companies to Work for three consecutive years.
Citation is known to be one of Hg's best performing businesses when it comes to employee engagement and satisfaction. Employee engagement is at the heart of the company's dynamic people strategy:
-- Valuing its people and showing appreciation: in addition to a flexible and comprehensive benefits package, more unusual perks include: a day off on your birthday; a paid week of leave when you get married; and an extra day off for new grandparents. Staff can nominate one another for annual awards, and long service awards celebrate those who have been part of the team for more than five years.
-- Creating a fun, friendly and supportive atmosphere: from virtual 'thankyous' which can be sent to anyone, to social get-togethers, Citation makes fun, friendliness and teamwork a core part of its culture.
-- Putting an emphasis on communication: Chris Morris, CEO, does a monthly business briefing for all staff which is available to colleagues in the field and those on leave. It is a forum for all colleagues to pose questions or share updates, and particularly valuable for keeping those not based at head office in touch with what's going on.
-- Based on feedback from colleagues, Citation recently launched a new concept of 'Bitesize' learning sessions, to increase knowledge sharing across different areas in the business and increase exposure to the leadership team. The fun and interactive sessions are approximately 30 minutes long and led by Citation colleagues. In 2017, they covered topics such as 'the future' with Citation's CEO, events planning, impactful writing and keeping your loved ones safe and healthy.
-- In 2017, Citation initiated a Culture Club to help nurture and protect the company's culture and define the few core values that matter most to employees. The entire firm was involved, and everyone had a say, as the new values "do the right thing", "take ownership and deliver", "fresh thinking" and "the human touch" were defined.
Citation firmly believes that employee engagement improves customer service. Achieving national recognition has also boosted its ability to attract talent, with responses to recruitment posts soaring.
Kinapse
Kinapse is a global provider of expert advisory, capability building and operational services to the world's leading Life Sciences organisations, throughout the drug development life cycle. Its services range across a number of areas including research and development, clinical operations, regulatory services, safety and pharmacovigilance, medical affairs and market access. The Group has offices in the UK, India and the United States and employs over 700 professionals worldwide.
Building a talented, expert, high performing workforce is absolutely key for Kinapse to retain and grow its existing business and win new clients. Kinapse hires thoughtfully and inclusively and places a big emphasis on diversity. With a company culture underpinned by its strong values system, employees are encouraged to be themselves, to perform at their best, and are supported to reach their full potential through development, training and challenging work programmes.
In 2017, Kinapse introduced an enhanced employee engagement programme called Kinapse Employee Engagement Programme, KEEP, which includes a number of initiatives:
-- KEEP Learning - A learning and development programme with masterclasses by senior leaders in the organisation on topics such as public speaking and leadership. Individual opportunities for growth are also available through Kinapse's Mentoring Programme and Chairman's Scholarship for Training Award.
-- KEEP Listening - Monthly sessions open to everyone, providing an opportunity to spend time with senior management, sharing ideas, suggestions and general feedback. Open, two-way communication is encouraged from top to bottom and if it is a confidential ear that is needed, the KEEP email box is manned by the Head of Talent Management who is there to offer advice, support and encouragement when needed.
-- KEEP Giving - A charity and volunteer initiative, driven by champions across various locations, focusing on fund-raising initiatives and giving back to local communities. The K-Day programme encourages employees to spend one work day a year (gifted from Kinapse) supporting a cause close to their heart, either as a volunteer or fund-raiser. Employees' health and wellbeing is also supported and encouraged beyond the workplace with a free eye test campaign, talks from local fitness centres and regular sports socials.
Kinapse believes an engaged workforce is vital to the success and growth of the business and everything it does is underpinned by its values, lived and breathed by the team on a daily basis.
Overview of the year
Net asset value (NAV)
During the year, the NAV of the Company increased by GBP105.2 million, from GBP615.8 million to GBP721.0 million at 31 December 2017.
Attribution analysis of movements in NAV
Revenue Capital Total
GBP'000 GBP'000 GBP'000
------------------------------ --------- ---------- ----------
Opening NAV as at 1 January
2017 37,156 578,600 615,756
Realised capital and
income proceeds from
investments in excess
of 31 December 2016 book
value 4,086 37,591 41,677
Net unrealised capital
and income appreciation
of investments 23,991 101,550 125,541
Net realised and unrealised
gains from liquid resources 1,182 (381) 801
Dividend paid (23,141) - (23,141)
Expenditure (2,834) (2,393) (5,227)
Taxation (43) - (43)
Investment management
costs:
Priority profit share
- current year charge (7,711) - (7,711)
Priority profit share
- net loan allocation 1,372 (1,372) -
Carried interest - current
year provision - (26,629) (26,629)
------------------------------ --------- ---------- ----------
Closing NAV as at 31
December 2017 34,058 686,966 721,024
------------------------------ --------- ---------- ----------
Analysis of NAV movements
There were a number of underlying factors contributing to the increase in the NAV. Positive impacts were the GBP125.5 million revaluation of the unquoted portfolio and uplifts of GBP41.7 million on the realisation of investments compared with their carrying value at the start of the year. Reductions in the NAV included: the payment of GBP23.1 million of dividends to shareholders and Hg's remuneration (GBP7.8 million and a GBP26.6 million increase in the provision for future carried interest).
Realised and unrealised movements in the value of investments Investment name and ranking GBP'million by value at 31 December 2017 -------------------------------------- ------------- Visma (1) 36.5 IRIS (2) 19.4 Sovos Compliance (3) 14.2 Sequel Business Solutions (sold) 12.5 Zenith (sold) 10.9 QUNDIS (sold) 9.7 Ullink (sold) 9.5 Other Mercury investments 8.9 CogitalGroup (5) 7.5 Teufel (19) 6.6 Parts Alliance (sold) 6.5 JLA (4) 5.7 A-Plan (7) 5.1 Foundry (10) 5.1 Renewable energy 4.8 Zitcom (sold) 4.5 Allocate Software (14) 4.0 Raet (8) 3.4 Atlas (27) 3.2 TeamSystem (16) 3.0 Trace One (17) 2.9 Hg 6E 2.9 Kinapse (24) (3.9) Frösunda (31) (7.4) Radius (12) (8.3) -------------------------------------- -------------
Analysis of movements in the value of investments
During the year, the value of the unrealised investments increased by GBP16.5 million, before the provision for carried interest. The majority of the increase (GBP160.2 million) relates to increases from profit growth in the underlying investments and GBP46.0 million from increased ratings.
These were partially offset by GBP109.1 million of decreases driven by realisations at carrying value net of acquisitions and an increase in net debt of GBP82.8 million resulting from refinancings that returned cash to the Company and further M&A activity within the portfolio.
Top 20 portfolio trading performance as at 31 December 2017
The top 20 buyout investments (representing 83% of total investments by value) have delivered strong sales growth of 14% and EBITDA growth of 16% over the last twelve months ('LTM').
This demonstrates consistent robust growth with revenues and EBITDA growing on average by 12% p.a. and 16% p.a. respectively over the last three years. The business model characteristics of these companies give us confidence that this double-digit growth can be achieved consistently going forward.
More than 70% of the businesses we own are seeing double-digit revenue growth, and more than 80% of the portfolio has delivered double-digit EBITDA growth over the last twelve months.
Top 20 LTM sales growth: +14%
% of top 20
portfolio by
Number of investments value within
LTM Sales within associated associated
Growth rates GBP' million band band
-------------- -------------- ---------------------- --------------
<0% p.a. 112 2 5%
0% to <10%
p.a. 806 7 23%
10% to <20%
p.a. 1,323 7 48%
>20% p.a. 543 4 24%
-------------- -------------- ---------------------- --------------
Profits have grown at a faster rate than revenues. Investment made over the last few years into the cost base of a number of our companies, for example, to finance increased sales and marketing capabilities, strengthen management and new product development, continues to bear fruit.
We continue to see very robust and consistent double-digit trading performance from Visma, IRIS, Sovos Compliance, Foundry, Allocate Software and Intelliflo in the technology sector, and CogitalGroup and JLA in the Services sector.
Whilst new to the portfolio, Esendex has seen a good start to its life with Hg. Over 2017, we have taken the decision to write down one of our top twenty investments, Radius, and in addition, Frösunda and Kinapse whose operational performance has been below expectations over the year.
Overall, continued strong earnings growth and cash generation continue to drive equity value in our investments.
Top 20 LTM profit growth: +16%
% of top 20
portfolio by
Number of investments value within
LTM EBITDA within associated associated
Growth rates GBP' million band band
-------------- -------------- ---------------------- --------------
<0% p.a. 4 1 2%
0% to <10%
p.a. 130 4 14%
10% to <20%
p.a. 446 6 56%
>20% p.a. 158 9 28%
-------------- -------------- ---------------------- --------------
Valuation and gearing analysis as at 31 December 2017
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; this resulted in an average EBITDA multiple for the top 20 buyout investments of 16.4x (14.2x at 31 December 2016 and 16.0x at 30 June 2017).
There remains a continued shift in the mix of the portfolio to higher growth businesses, in particular in the technology sector, where we hold a number of companies with substantial opportunities to grow their SaaS business.
Seven of the top 20 companies (representing 62% by value) are valued at a multiple of over 16x (Mitratech, Visma, TeamSystem, IRIS, Sovos Compliance, Ullink and Allocate). All have attractive business models, are growing strongly and generating cash, and are in demand from investors. As we noted earlier, we have increased our exposure to Visma and Sovos Compliance during the year.
We continue to take a considered and prudent approach in determining the level of maintainable earnings to use in each valuation. Most holdings have been valued using the LTM earnings to 30 November 2017, 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. 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 where relevant and recent, we will also use M&A data.
Our companies make appropriate use of gearing, with an average net debt for the top 20 of 5.4x LTM EBITDA. Many of our businesses have highly predictable, strong earnings growth and are very cash generative, enabling us to use debt to leverage our returns. Over 2017 we took the opportunity to refinance Visma, A-Plan, Ullink and IRIS as detailed below.
2017 saw significant increases in valuations. These were primarily driven by strong trading performance in the underlying businesses.
Top 201 EV to EBITDA valuation multiple: 16.4x
% of top
Number of 20* portfolio
investments by value
EBITDA within associated within associated
EV to EBITDA bands GBP' million band band
-------------------- -------------- ------------------- -------------------
<12.0x 33 3 7%
12.0x to <14.0x 180 5 23%
14.0x to <16.0x 39 3 8%
16.0x to <18.0x 257 5 39%
>18.0x 252 2 23%
-------------------- -------------- ------------------- -------------------
*Excluding two investments valued on a basis other
than earnings.
Top 20 net debt to EBITDA ratio: 5.4x
% of top
Number of 20 portfolio
investments by value
Debt within associated within associated
Debt to EBITDA bands GBP' million band band
---------------------- -------------- ------------------- -------------------
<3.0x 137 6 16%
3.0x to <5.0x 1,439 5 32%
5.0x to <6.0x 559 2 19%
6.0x to <7.0x 684 3 11%
>7.0x 1,394 4 22%
---------------------- -------------- ------------------- -------------------
Outstanding commitments of the Company
2017 ended with liquid resources of GBP160 million, supported by an undrawn bank facility of GBP80 million. Outstanding commitments as at 31 December 2017 were GBP449 million, as listed below. We anticipate that the majority of these outstanding commitments will be drawn down progressively over the next four to five years and are likely to be partly financed by future cash flows from realisations. Additionally, to mitigate the risk of being unable to fund any draw-down under its commitments to invest alongside certain of Hg's funds, the Board has negotiated a right to opt out, without penalty, of the Company'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 Outstanding
vintage commitment commitments commitments
GBP'million as at 31 December as at 31 December
2017 2016
------------------- ---------- ------------- ---------------------- ----------------------
% of % of
GBP'million NAV GBP'million NAV
------------------- ---------- ------------- ------------ -------- ------------ --------
Hg 8 2017 350.0 341.1 47.3% 350.0 56.9%
------------------- ---------- ------------- ------------ -------- ------------ --------
Hg Mercury 2 2017 80.0 73.3 10.2% - -
------------------- ---------- ------------- ------------ -------- ------------ --------
Hg 7 2013 200.0 - - 39.8 6.5%
------------------- ---------- ------------- ------------ -------- ------------ --------
Hg Mercury 2011 60.0 6.2 0.9% 10.3 1.7%
------------------- ---------- ------------- ------------ -------- ------------ --------
Asper RPP II 2010 35.51 8.3 1.1% 7.5 1.2%
------------------- ---------- ------------- ------------ -------- ------------ --------
Hg 6 2009 285.0 17.2 2.4% 11.0 1.8%
------------------- ---------- ------------- ------------ -------- ------------ --------
Hg 6E(3) 2009 15.0 0.9 0.1% 0.6 0.1%
------------------- ---------- ------------- ------------ -------- ------------ --------
Pre-Hg 6 vintage pre-2009 120.02 1.3 0.2% 1.3 0.2%
------------------- ---------- ------------- ------------ -------- ------------ --------
Asper RPP I 2006 19.24 0.8 0.1% 0.8 0.1%
------------------- ---------- ------------- ------------ -------- ------------ --------
Total 449.1 62.3% 421.3 68.5%
------------------------------- ------------- ------------ -------- ------------ --------
Liquid resources 160.3 22.2% 45.8 7.4%
------------------------------- ------------- ------------ -------- ------------ --------
Net outstanding
commitments
unfunded by
liquid resources 288.8 40.1% 375.5 61.1%
------------------------------- ------------- ------------ -------- ------------ --------
(1) Sterling equivalent of EUR40.0 million.
(2) Excluding any co-investment participations made
through HGT LP.
(3) Partnership interest acquired during 2011.
(4) Sterling equivalent of EUR21.6 million.
----------------------------------------------------------------------------------------------
GBP449m
Total outstanding commitments
GBP414.4 million
Hg 8 and Hg Mercury 2 commitment. The Company's commitment to invest alongside
these funds will be drawn down over the next four to five years.
GBP34.7 million
Investment period completed; remaining funds retained for follow-on investment.
Investment portfolio of the Company
Residual Total
cost valuation(1) Value
Fund limited partnerships GBP'000 GBP'000 %
-------------------------------------- --------- -------------- -------
Primary buyout funds:
1 HGT 7 LP 170,780 261,941 46.6%
HGT 7 LP - Provision for carried
interest - (20,584) (3.7%)
2 HGT 6 LP 90,960 165,927 29.5%
HGT 6 LP - Provision for carried
interest - (49,681) (8.8%)
3 HGT LP 73,692 111,748 20.0%
4 Hg Mercury D LP 35,152 66,262 11.8%
Hg Mercury D LP - Provision for
carried interest - (10,058) (1.8%)
5 HGT 8 LP 6,720 6,909 1.2%
6 HGT Mercury 2 LP 6,302 6,585 1.2%
-------------------------------------- --------- -------------- -------
Total primary buyout funds 383,606 539,049 96.0%
-------------------------------------- --------- -------------- -------
Secondary buyout fund interests:
5 Hg 6 E LP - 8,119 1.4%
Hg 6 E LP - Provision for carried
interest - (2,588) (0.5%)
-------------------------------------- --------- -------------- -------
Total secondary buyout fund interests - 5,531 0.9%
-------------------------------------- --------- -------------- -------
Total buyout funds 383,606 544,580 96.9%
-------------------------------------- --------- -------------- -------
Renewable energy funds:
6 Asper RPP II LP 19,160 16,709 3.0%
7 Asper RPP I LP 4,861 794 0.1%
-------------------------------------- --------- -------------- -------
Total renewable energy funds 24,021 17,503 3.1%
-------------------------------------- --------- -------------- -------
Total investments net of carried
interest provision 407,627 562,083 100.0%
-------------------------------------- --------- -------------- -------
(1) Includes accrued income.
Sector by value* of our primary buyouts
76% Technology 20% Services 3% Industrial technology 1% Healthcare
Geographic spread by value* of our primary buyouts
47% UK 17% Scandinavia 15% North America 13% Other Europe 8% Germany
Investment vintage by value* of our primary buyouts
6% 2017 29% 2016 9% 2015 22% 2014 34% pre 2014
Analysis by value* of investment return relative to its original cost
87% Above 13% Below
Representing aggregate realised proceeds and unrealised valuations of an investment
*Excluding carried interest provision
Investments and realisations
Investments 2017
Over the course of the year, Hg has invested a total of GBP764 million on behalf of its clients, with the Company's share being GBP73 million.
The vast majority of our investments are generated by establishing and developing relationships with companies in our chosen segments 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 sub-sectors and 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.
Over 2017, the Company has invested GBP11.5 million (Mitratech and Esendex) by way of co-investment, in addition to its commitment to invest alongside Hg 7 and Hg Mercury 1. This is an attractive way to invest more funds, when available, with no fees or carried interest being payable.
New investments
Mitratech - Mitratech is a leading global provider of legal, risk and compliance software serving multinationals and SMEs across Europe and the US.
This investment by the Technology team follows many years of experience in the regulatory-driven business software space. Mitratech demonstrates many of the business model characteristics that Hg looks for, including: a business-critical product; a high proportion of repeatable revenues; strong customer loyalty; an opportunity for M&A; and a strong management team with a proven track record in both organic and M&A-led growth.
fundinfo - fundinfo is a leading technology platform for fund data and documents publication and dissemination to the global fund management industry (including banks, insurance companies, financial advisors, family offices and platforms), headquartered in Zurich, Switzerland.
fundinfo will join Hg's current network of European headquartered FinTech investments, including Intelliflo (SaaS financial advisor software), Ullink (connectivity and trading software) and the recently exited Sequel (insurance software and analytics).
Gentrack - Gentrack is a publicly listed developer of specialist software for energy utilities, water utilities and airports around the world. The investment in Gentrack helped finance the acquisition of Junifer Systems, a leading provider of utilities software in the UK. The combined product offering of Gentrack and Junifer is well positioned for growth, capitalising on the growing market share of independent energy retailers, the UK smart metering roll-out, and retail competition in water for commercial and industrial consumers. Gentrack also intends to take Junifer's product offering into other geographic markets as a solution for new entrants and SME retailers.
DADA - In October, the Mercury team agreed to acquire a majority stake in DADA, a leading provider of hosting services to SMEs in Italy and the UK as well as other European geographies.
This was acquired as part of a public-to-private transaction from the Italian Stock Exchange and represents the first investment from the Mercury 2 fund. The investment in DADA is another example of the Mercury team's approach to investing in technology infrastructure businesses.
MeinAuto.de - In December, Hg's Munich team led an investment in MeinAuto.de ('MeinAuto'), a leading B2C online platform for new car purchases based in Germany. This investment is the first step in an initiative by Hg to develop a new integrated and technology enabled service provider in the automotive distribution & financing space and is the result of considerable sector work undertaken by Hg in recent years in the automotive services and software spaces with historical investments including Zenith and Epyx.
Further investments
Esendex - Esendex is a leading provider of mission-critical business messaging services across Europe and represents a further investment into the Technology Infrastructure cluster. On completion of the transaction Esendex was merged with an existing Mercury portfolio company, Mobyt, which provides similar business messaging solutions in Italy and France. Esendex demonstrates many of the business model characteristics that Hg looks for, including: a high proportion of recurring revenues from serving a large fragmented base of SMEs, delivering an operationally critical service and the opportunity to back a strong management team.
Visma - In June, Hg announced a further investment in Visma, a leading provider of mission-critical business software to SMEs in the Nordic region, following a decision by KKR to sell its holding in the group. Hg is the lead investor in the new transaction structure which valued the business at NOK 45 billion (GBP4.2 billion), the largest ever software buyout in Europe.
In 2002, Hg's Technology team 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. Hg has made more than twelve investments in this space over the last fifteen years and more than 150 bolt-on acquisitions over this same period. In total, Hg has made 37 software TMT investments and over 200 bolt-on software acquisitions since 2002, making the firm comfortably the most active European TMT investor over this period.
Sovos Compliance - In November, Hg's Technology team made a further investment in Sovos Compliance by acquiring the minority stake held by Vista.
Sovos Compliance is a global provider of compliance software solutions. The company has performed well since Hg's initial investment in March 2016, with strong organic growth in both revenue and EBITDA.
Further investment since the year-end
DADA - Following the initial acquisition made in October 2017 (see above), Hg announced in February 2018 that it had successfully completed a tender offer for the remaining ordinary shares and would complete a public-to-private transaction of DADA from the Italian Stock Exchange. The Company will have invested a total of approximately GBP7.1 million in DADA, with other institutional clients of Hg investing alongside the Company through the Mercury 2 Fund.
Further details on investments as at 31 December 2017 can be found on pages 48 to 70 of the full Annual Report and Accounts.
Realisations 2017
Over the course of the year, Hg has returned a total of GBP1.5 billion to its clients, including GBP224 million to the Company.
It was a very active period for realisations. We have made several references to 'frothy' markets over the past year and this has helped inform our approach to selling investments, whilst also carefully considering our appetite for selling versus the benefits of remaining invested in selected businesses for longer.
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 the Company, and we will continue to assess further opportunities here.
Exits
Zenith - In March 2017, we completed the sale of Zenith, the largest independent vehicle leasing business in the UK, to Bridgepoint in a transaction totalling GBP750 million. This transaction delivered a 2.9x investment multiple and a 46% gross IRR over the investment period. The sale of Zenith resulted in an uplift of 23% over the carrying value of the investment at 31 December 2016.
QUNDIS - In May 2017, the Munich team completed the sale of QUNDIS, a leading provider of sub-metering solutions in Europe, to a German investment group, KALORIMETA, a leading service provider of climate-intelligent solutions in the buildings sector, for a total enterprise value of c. EUR400 million. This transaction delivered a 3.5x investment multiple and a c. 29% gross IRR over the investment period, with Hg retaining a minority position in the combined group. The sale of QUNDIS resulted in an uplift of 29% over the carrying value of the investment at 31 December 2016. A case study of this investment appears above.
Zitcom - In June 2017, the Technology team completed the sale of Zitcom, a Danish hosting and cloud solutions provider operating in the SME segment, to Intelligent, a Belgian headquartered provider of hosting services. This transaction delivered a 3.3x investment multiple and a 141% gross IRR over the investment period. The sale of Zitcom resulted in an uplift of 105% over the carrying value of the investment at 31 December 2016.
Parts Alliance - In June, Hg announced that it had agreed the sale of Parts Alliance, a UK automotive aftermarket parts distributor, to Uni-Select Inc., a listed Canadian distributor of automotive refinish and industrial paint products and aftermarket parts. The transaction had a value of GBP205 million, and delivered a 2.0x investment multiple and a 19% gross IRR over the investment period. The sale of Parts Alliance resulted in an uplift of 46% over the carrying value of the investment at 31 December 2016.
Valueworks - In July, we completed the sale of Valueworks, a provider of a private SaaS platform for procurement and contract management in the social housing sector, to Inprova, a provider of procurement services for social housing. This was for a nominal sum and will not generate any proceeds to the Company.
e-conomic - In June, we announced that the Technology team had agreed the sale of the Hg 6 vintage investment in e-conomic to Montagu and ICG, realising additional proceeds of GBP220 million to clients, including GBP33 million to the Company. The sale of e-conomic resulted in an uplift of 33% over the carrying value of the investment at 31 December 2016, delivering an overall return of 2.7x cost and a 29% gross IRR.
Sequel Business Solutions - In August, we completed the sale of Sequel Business Solutions ('Sequel'), a provider of software and services to the Lloyd's of London and the broader insurance markets, to Verisk Analytics (Nasdaq: VRSK), a leading data analytics provider serving customers in property/casualty insurance, natural resources, and financial services, headquartered in the USA. This transaction delivered a 5.1x investment multiple and a 77% gross IRR over the investment period. The sale of Sequel resulted in an uplift of 161% over the carrying value of the investment at 31 December 2016. A case study of this investment appears above.
Mainio Vire - In June 2016, we announced the sale of Mainio Vire, a provider of elderly care, mental health and home services in Finland, to Mehiläinen, a private provider of social and health care services, also based in Finland. Hg retained a small residual stake in this company which was sold in August 2017, returning a further GBP3.8 million to the Company.
Realisation since the year-end
Ullink - In November 2017, the Technology team announced that it had received a definitive binding offer from Itiviti, a company backed by Nordic Capital, to acquire Ullink, a leading global provider of electronic trading and connectivity solutions to the financial community. This proposed sale is subject to French workers' council consultations, and customary approvals, such as regulatory clearances. The sale of Ullink is expected to return GBP24 million to the Company, delivering a 3.0x investment multiple and a 35% gross IRR over the period.
Refinancings
Visma - In April 2017, the Technology team completed the refinancing of Visma, a leading provider of mission-critical software to SMEs in Scandinavia, returning proceeds of GBP94 million to Hg clients, including GBP9.2 million to the Company.
A-Plan - In March 2017, the Services team completed the refinancing of A-Plan, a UK based distributor of motor and household insurance policies to SMEs and individuals. This returned GBP52.3 million to Hg clients, including GBP5.2 million to the Company, representing a 35% return on the original investment made in 2015.
Ullink - In May 2017, the Technology team completed the refinancing of Ullink, a global provider of electronic trading applications and connectivity to the financial community. On completion, this returned GBP43.8 million to Hg clients, including GBP4.3 million to the Company, representing a 43% return on the original investment made in 2014.
IRIS - In October, the refinancing of IRIS, a provider of business-critical software and services to SMEs in the UK, was completed. This returned GBP50 million to Hg clients, including GBP7.5 million to the Company. Since 2011, IRIS has returned 57% on the original investment made.
Refinancing since the year-end
JLA - In January, the Services team completed the refinancing of JLA, a provider of laundry and catering services, returning GBP25 million to Hg clients, including GBP3.8 million to the Company.
JLA has now returned 211% on the original investment made in March 2010.
Summary of investment and realisation activity
Investments made during the year
Company Sector Geography Activity Cost
GBP'000
Global provider
North of legal, risk and
Mitratech Technology America compliance software 22,258
B2C online platform
MeinAuto.de Services Germany for new car purchases 6,720
Domain hosting and
DADA Technology Italy digital services 6,302
Technology platform
for fund data and
fundinfo Technology Switzerland documentation 3,117
Developer of software
for utilities and
Gentrack Technology New Zealand airports 2,069
--------------------- ------------ ------------- ------------------------- ---------
New investments 40,466
----------------------------------------------------------------------------- ---------
North Tax compliance software
Sovos Compliance Technology America solutions 14,224
Provider of business
Visma Technology Scandinavia software to SMEs 13,229
Provider of business
messaging services
Esendex Technology UK across Europe 7,635
Other 1,922
Software and services
to the UK accountancy
IRIS Technology UK market (4,455)1
--------------------- ------------ ------------- ------------------------- ---------
Further investments 32,555
----------------------------------------------------------------------------- ---------
Total investments on behalf
of the Company 73,021
-------------------------------------------------- ------------------------- ---------
Realisations made during the year
Company Sector Exit route Proceeds(2)
GBP'000
--------------------------- ------------- -------------- ------------
Secondary
Zenith Services sale 59,090
Industrial
QUNDIS technology Trade sale 37,302
Secondary
e-conomic Technology sale 36,647
Parts Alliance Services Trade sale 21,142
Sequel Business Solutions Technology Trade sale 20,247
Zitcom Technology Trade sale 8,818
Mainio Vire Healthcare Trade sale 3,775
--------------------------- ------------- -------------- ------------
Full realisations 187,021
---------------------------------------------------------- ------------
Visma Technology Refinancing 9,156
Distribution
Hg 6 E LP Fund received 8,862
A-Plan Services Refinancing 5,150
Renewable Distribution
Asper RPP II LP energy received 4,899
Ullink Technology Refinancing 4,317
IRIS Technology Refinancing 3,039
Other 1,390
---------------------------------------------------------- ------------
Partial realisations 36,813
---------------------------------------------------------- ------------
Total proceeds from realisations
received by the Company 223,834
------------------------------------------ -------------- ------------
(2) Includes gross revenue received
during the year-ended 31 December
2017.
Outlook
2017 has been a successful year for Hg in many ways but particularly in terms of a combined focus on driving and crystallising value across our network of portfolio companies.
This has been primarily underpinned by strong trading across the unrealised portfolio, alongside a series of realisations throughout the year completed at attractive valuations, especially relative to prior book value. In terms of our outlook for 2018, we expect the velocity of Hg realisations to continue at a broadly similar pace, with a number of exit processes already underway.
Over the year, and very consciously given current market conditions, Hg has focused on being a material net seller; realising in cash almost double the amount invested over the previous 12 months. This has generated c.GBP1.5 billion to our clients, including GBP224 million to the Company, from seven exits and four refinancings. The largest of these was in relation to the sale of Zenith, announced in January, and QUNDIS, which completed in May. Strong performance over the period has continued to demonstrate the attractiveness of Hg portfolio companies to both trade and financial buyers, as evidenced by the recent sale of Ullink, announced in November 2017, at a multiple of 3.0x original cost and a gross IRR of 35%. We anticipate returning further capital over the next six to 12 months.
Trading during 2017 has continued to generate double-digit revenue and EBITDA growth across the businesses we own. Given their defensive characteristics and our focus on protected business models, we believe our investments are well positioned to see strong growth on an absolute and relative basis going forward, even if macro-economic conditions deteriorate over the coming months. This is reinforced by our historic performance during the financial crisis post-Lehman, when our businesses continued to grow both revenues and EBITDA in aggregate throughout the period from 2008 to 2010, without a down year.
Despite the focus on realisations, Hg has continued to invest selectively over the last 12 months, capitalising on situations where we have a unique angle and have built many years of knowledge of the business, and typically building on a strong relationship with a founder or management team. Despite the heat of the current market, we do continue to see exciting and attractive investment opportunities in our target geographies and sub-sectors, just as we did in the closing stages of the last upwards cycle in 2005 to 2008.
This led to five new investments over the course of 2017: Mitratech, a global provider of regulatory tax compliance software; fundinfo, a technology platform for fund data and documentation; Gentrack, a publicly listed global developer of specialist software for energy utilities, water utilities and airports; DADA, a provider of hosting services in Italy and, most recently, MeinAuto, a leading B2C online platform for new car purchases based in Germany. In addition to these new investments, significant further capital was deployed into three businesses we know well: Visma, Sovos Compliance and Esendex.
In this type of market environment, we believe that the clarity of our investment strategy continues to confer a number of clear advantages to a disciplined buyer. Specifically, we will continue to focus on investing in businesses that provide a business-critical product or service, to a fragmented customer base, and which benefit from strong contracted or recurring revenues. This should enable us to identify opportunities with the appropriate business model to generate strong, risk-adjusted returns for our clients. With the addition of the Saturn Funds and Transition Capital, we are able to maintain the clarity of our investment strategy as described, while broadening our opportunity set of potential investments and adding to the scale and reach of our network within European technology.
During 2017, we have continued to consider the UK's forthcoming exit from the European Union and our prognosis remains that this will have a relatively limited impact on our investments, especially given the characteristics of our businesses, their geographic profile and their relatively protected nature. Hg's pan-European presence and office in Germany (since 1999) also offers flexibility in terms of the breadth of our investment focus and general approach. More broadly, the post referendum environment has seen a general unwinding of historic currency losses on non-sterling investments across our funds, slightly benefiting valuations over the year. We have now realised nine portfolio companies since the Brexit vote at the end of June 2016, six of which were based in the UK.
Finally, our focus on specific operational improvements in these areas of investment focus, aligned with the efforts of our dedicated and large internal 'OI' team, also means that we believe we can continue to generate meaningful long-term value in a number of particular areas across the portfolio on a repeatable basis, irrespective of the challenges of the broader macro-environment. From pricing analysis and customer satisfaction to cyber security, these portfolio related initiatives will continue to remain an area of real focus going forward.
______________________________________________________________________________________________________
Strong trading from the portfolio, combined with capital returns from exits above book value, continue to drive value for our investors.
Steven Batchelor, COO & Partner, Hg
Overview of the underlying investments
held through the Company's limited partnerships
Year Residual Total Cum.
Vintage Sector Location of investment cost valuation(4) Value value
GBP'000 GBP'000 % %
----------------- ----------- ----------- ----------- -------------- -------- ------------- ------- ------
1 Visma(1) HGT 7/HGT Technology Scandinavia 2014 45,365 97,009 15.0% 15.0%
2 IRIS HGT 6 Technology UK 2011 21,654 76,526 11.9% 26.9%
Sovos
3 Compliance(1) HGT 7/HGT Technology N. America 2016 38,508 71,694 11.1% 38.0%
4 JLA HGT 6 Services UK 2010 3,511 30,272 4.7% 42.7%
5 CogitalGroup(1) HGT 7/HGT Services UK 2016 20,966 29,049 4.5% 47.2%
6 Ullink (sold) HGT 7 Technology France 2014 7,393 24,302 3.8% 51.0%
7 A-Plan HGT 7 Services UK 2015 10,447 22,451 3.5% 54.5%
8 Raet HGT 7 Technology Netherlands 2016 16,127 20,427 3.2% 57.7%
9 Achilles(2) HGT Technology UK 2008 15,218 20,150 3.1% 60.8%
10 Foundry HGT 7 Technology UK 2015 15,142 19,739 3.1% 63.9%
11 Mitratech(1) HGT 7/HGT Technology N. America 2017 22,258 19,564 3.0% 66.9%
12 Radius HGT 6 Services UK 2013 18,686 16,466 2.6% 69.5%
13 Esendex(3) Mercury/HGT Technology UK 2016 11,791 13,595 2.1% 71.6%
14 Allocate Software Mercury Technology UK 2014 4,094 13,553 2.1% 73.7%
15 Citation HGT 7 Services UK 2016 10,892 11,137 1.7% 75.4%
16 TeamSystem HGT 6 Technology Italy 2010 144 10,702 1.7% 77.1%
17 Trace One Mercury Technology France 2016 4,489 10,370 1.6% 78.7%
18 Intelliflo Mercury Technology UK 2013 3,978 10,124 1.6% 80.3%
Industrial
19 Teufel HGT 6 technology Germany 2010 11,144 9,860 1.5% 81.8%
20 Lumesse HGT 6 Technology UK 2010 20,602 9,591 1.5% 83.3%
21 STP Mercury Technology Germany 2016 5,422 8,473 1.3% 84.6%
22 P&I(1) HGT 7/HGT Technology Germany 2013 1,796 7,936 1.2% 85.8%
23 Eucon Mercury Technology Germany 2015 4,408 7,930 1.2% 87.0%
24 Kinapse HGT 7 Services UK 2016 11,131 7,121 1.1% 88.1%
25 MeinAuto HGT 8 Services Germany 2017 6,720 6,909 1.1% 89.2%
Mercury
26 DADA 2 Technology Italy 2017 6,302 6,585 1.0% 90.2%
27 Atlas HGT Services UK 2007 12,542 6,406 1.0% 91.2%
Industrial
28 QUNDIS HGT 6 technology Germany 2012 922 6,319 1.0% 92.2%
29 EidosMedia HGT 7 Technology Italy 2015 8,414 5,323 0.8% 93.0%
30 Evaluate Mercury Technology UK 2016 3,733 4,912 0.8% 93.8%
31 Frösunda HGT 6 Healthcare Scandinavia 2010 14,296 3,991 0.6% 94.4%
32 fundinfo Mercury Technology Switzerland 2017 2,700 3,486 0.5% 94.9%
33 Gentrack HGT 7 Technology New Zealand 2017 2,069 3,335 0.5% 95.4%
34 e-conomic HGT 6 Technology Scandinavia 2013 - 997 0.2% 95.6%
Non-active investments (4) 743 318 - 95.6%
------------------------------ ----------- ----------- -------------- -------- ------------- ------- ------
Total buyout investments (38) 383,607 616,622 95.6%
------------------------------ ----------- ----------- -------------- -------- ------------- ------- ------
HGT 7/HGT Forward sale of
Currency hedges 6/HGT US$ and EUR - 2,750 0.4% 96.0%
Secondary Secondary fund
fund interests HG6E interests - 8,119 1.3% 97.3%
Asper
Renewable RPP I
energy / II Renewable energy 24,020 17,503 2.7% 100.0%
----------------- ----------- ---------------------------------------- -------- ------------- ------- ------
Total all
investments 407,627 644,994 100.0%
----------------- ----------- ----------- ----------- -------------- -------- ------------- ------- ------
(1) Investment through HGT 7 LP and co-investment participation through HGT LP.
(2) Investment and co-investment participation through HGT LP.
(3) Investment through HgCapital Mercury D LP and co-investment participation through HGT LP.
(4) Including accrued income but before the provision for carried interest of GBP82,911,000.
Non-Statutory Accounts
The financial information set out below does not constitute the Company's statutory accounts for the years ended 31 December 2016 and 2017 but is derived from those accounts. Statutory accounts for 2016 have been delivered to the Registrar of Companies, and those for 2017 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 2017
Revenue Capital
return return Total return
---------------------------- -------
2017 2016 2017 2016 2017 2016
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
---------------------------- ------- --------- --------- ---------- --------- ---------- ---------
Gains on investments
and liquidity funds 13 - - 109,738 76,667 109,738 76,667
(Losses)/gains on priority
profit share loans
(advanced to)/recovered
from General Partners 5(b) - - (1,372) 3,856 (1,372) 3,856
Net income 4 22,920 23,326 - - 22,920 23,326
Other expenses 6(a) (2,009) (1,772) - - (2,009) (1,772)
---------------------------- ------- --------- --------- ---------- --------- ---------- ---------
Net return before finance
costs and taxation 20,911 21,554 108,366 80,523 129,277 102,077
---------------------------- ------- --------- --------- ---------- --------- ---------- ---------
Finance costs 6(b) (825) (833) - - (825) (833)
---------------------------- ------- --------- --------- ---------- --------- ---------- ---------
Net return before taxation 20,086 20,721 108,366 80,523 128,452 101,244
---------------------------- ------- --------- --------- ---------- --------- ---------- ---------
Taxation 9(a) (43) (581) - - (43) (581)
---------------------------- ------- --------- --------- ---------- --------- ---------- ---------
Net return after taxation
attributable to reserves 20,043 20,140 108,366 80,523 128,409 100,663
---------------------------- ------- --------- --------- ---------- --------- ---------- ---------
Return per Ordinary
share 10(a) 53.70p 53.96p 290.33p 215.74p 344.03p 269.70p
---------------------------- ------- --------- --------- ---------- --------- ---------- ---------
The total return column of this statement represents
the Company'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 2017
-------------------------------------------------------------------
Notes 2017 2016
GBP'000 GBP'000
--------------------------------- ------ ----------- -----------
Fixed asset investments
--------------------------------- ------ ----------- -----------
Investments at fair value
through profit or loss:
--------------------------------- ------ ----------- -----------
Unquoted investments 12 490,976 506,961
--------------------------------- ------ ----------- -----------
Total fixed asset investments 490,976 506,961
--------------------------------- ------ ----------- -----------
Current assets - amounts
receivable after one year:
--------------------------------- ------ ----------- -----------
Accrued income on fixed
assets 14 71,107 65,280
--------------------------------- ------ ----------- -----------
Current assets - amounts
receivable within one year:
--------------------------------- ------ ----------- -----------
Debtors 14 414 572
--------------------------------- ------ ----------- -----------
Investments at fair value
through profit or loss:
--------------------------------- ------ ----------- -----------
Liquidity funds 15 155,938 39,590
--------------------------------- ------ ----------- -----------
Uninvested capital in limited
partnerships 429 2,198
--------------------------------- ------ ----------- -----------
Cash at bank 16 3,925 3,982
--------------------------------- ------ ----------- -----------
Total current assets 231,813 111,622
--------------------------------- ------ ----------- -----------
Creditors - amounts falling
due within one year 17 (1,765) (2,827)
--------------------------------- ------ ----------- -----------
Net current assets 230,048 108,795
--------------------------------- ------ ----------- -----------
Net assets 721,024 615,756
--------------------------------- ------ ----------- -----------
Capital and reserves:
--------------------------------- ------ ----------- -----------
Called up share capital 20 9,331 9,331
--------------------------------- ------ ----------- -----------
Share premium account 21 120,368 120,368
--------------------------------- ------ ----------- -----------
Capital redemption reserve 21 1,248 1,248
--------------------------------- ------ ----------- -----------
Capital reserve - unrealised 21 79,256 81,061
--------------------------------- ------ ----------- -----------
Capital reserve - realised 21 476,763 366,592
--------------------------------- ------ ----------- -----------
Revenue reserve 21 34,058 37,156
--------------------------------- ------ ----------- -----------
Total equity shareholders'
funds 721,024 615,756
--------------------------------- ------ ----------- -----------
Net asset value per Ordinary
share 10(b) 1,931.7p 1,649.7p
--------------------------------- ------ ----------- -----------
Ordinary shares in issue
at 31 December 37,324,698 37,324,698
--------------------------------- ------ ----------- -----------
The financial statements of HgCapital Trust plc
(registered number 01525583) were approved and authorised
for issue by the Board of Directors on 2 March 2018
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 2017
-----------------------------------------------------------------------
Notes 2017 2016
GBP'000 GBP'000
--------------------------------------- ------ ---------- ----------
Net cash inflow from operating
activities 7 10,990 21,761
--------------------------------------- ------ ---------- ----------
Investing activities:
--------------------------------------- ------ ---------- ----------
Purchase of fixed asset investments 12 (73,021) (104,100)
--------------------------------------- ------ ---------- ----------
Proceeds from the sale of fixed
asset investments 12 201,584 102,193
--------------------------------------- ------ ---------- ----------
Purchase of liquidity funds 15 (166,409) (88,737)
--------------------------------------- ------ ---------- ----------
Redemption of liquidity funds 15 50,700 80,200
--------------------------------------- ------ ---------- ----------
Net cash inflow/(outflow) from
investing activities 12,854 (10,444)
--------------------------------------- ------ ---------- ----------
Financing activities:
--------------------------------------- ------ ---------- ----------
Servicing of finance (760) (703)
--------------------------------------- ------ ---------- ----------
Equity dividends paid 11 (23,141) (14,930)
--------------------------------------- ------ ---------- ----------
Net cash outflow from financing
activities (23,901) (15,633)
--------------------------------------- ------ ---------- ----------
Decrease in cash and cash equivalents
in the year 16 (57) (4,316)
--------------------------------------- ------ ---------- ----------
Cash and cash equivalents at
1 January 16 3,982 8,298
--------------------------------------- ------ ---------- ----------
Cash and cash equivalents at
31 December 16 3,925 3,982
--------------------------------------- ------ ---------- ----------
The following notes form part of these financial
statements.
-----------------------------------------------------------------------
Statement of changes in equity
for the year ended 31 December 2017
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
2016 9,331 120,368 1,248 81,061 366,592 37,156 615,756
Net return
from ordinary
activities - - - (1,805) 110,171 20,043 128,409
Equity dividends
paid 11 - - - - - (23,141) (23,141)
------------------ ----- -------- -------- ----------- ----------- --------- -------- --------
At 31 December 20,
2017 21 9,331 120,368 1,248 79,256 476,763 34,058 721,024
------------------ ----- -------- -------- ----------- ----------- --------- -------- --------
At 31 December
2015 9,331 120,368 1,248 14,023 353,107 31,946 530,023
Net return
from ordinary
activities - - - 67,038 13,485 20,140 100,663
Equity dividends
paid 11 - - - - - (14,930) (14,930)
------------------ ----- -------- -------- ----------- ----------- --------- -------- --------
At 31 December 20,
2016 21 9,331 120,368 1,248 81,061 366,592 37,156 615,756
------------------ ----- -------- -------- ----------- ----------- --------- -------- --------
The following notes form part of these financial statements.
Notes to the financial statements
1. Principal activity
The principal activity of the Company is investment. The Company 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 November 2014 and updated in January 2017. All of the Company's operations are of a continuing nature.
The Company has considerable financial resources and, as a consequence, the Directors believe that the Company is well placed to manage its business risks. After making enquiries, the Directors have a reasonable expectation that the Company will have adequate resources to continue in operational existence for the foreseeable future.
Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.
The same accounting policies, presentation and methods of computation are followed in these financial statements as applied in the Company's previous annual audited report and accounts.
3. Organisational structure and accounting policies
Partnerships where the Company is the sole limited partner
The Company entered into six separate partnership agreements with general and founder partners in May 2003 (subsequently revised in January 2009), January 2009, July 2011, March 2013, December 2016 and February 2017; at each point an investment holding limited partnership was established to carry on the business of an investor, with the Company 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 and HGT Mercury 2 LP (together the 'primary buyout funds') is to hold all the Company's investments in primary buyouts. Under the partnership agreements, the Company made capital commitments into the primary buyout funds, with the result that the Company 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 above. The underlying investments that are held indirectly are included in the overview of investments above.
Consolidated financial statements have not been prepared because the Company 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 the Company is a minority limited partner
In July 2011, the Company 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 the Company is now a limited partner alongside 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 above.
The Company 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 above.
Priority profit share and other operating expenses, payable by partnerships in which the Company 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 23) is entitled to appropriate, as a first charge on the net income of the funds, an amount equivalent to its priority profit share ('PPS'). The Company 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 the Company. 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 23) 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 the Company, when the right to these returns is established.
Accordingly, the Company'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 the Company 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 the Company 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 the Company's balance sheet when the Company 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 the Company 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. 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.
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 2015 edition. Where relevant, the Company applies the policies stated below to the investments held by HGT LP, HGT 6 LP, HGT 7 LP, HGT 8 LP, HgCapital Mercury D LP and HGT Mercury 2 LP, 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 the Company 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.
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 35 of 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 36 and 37 of the full Annual Report and Accounts. A sensitivity analysis to equity price risk can be found in note 19.
4. Income
Revenue return
2017 2016
GBP'000 GBP'000
----------------------------- ------------ ------------
Total net income comprises:
Interest 22,706 22,816
Dividend 60 354
Non-interest income 154 156
Total net income 22,920 23,326
----------------------------- ------------ ------------
Total net income 22,920 23,326
----------------------------- ------------ ------------
All income that is recognised by the primary buyout funds, net of PPS, is allocated to the Company and recognised when the right to this income is established. This income and PPS is analysed further below.
Revenue return
2017 2016
GBP'000 GBP'000
---------------------------------------------- ------------- ------------
Income from investments held by
HGT LP, HGT 6 LP, HGT 7 LP, HGT 8 LP,
HgCapital Mercury D LP and HGT Mercury
2 LP:
UK unquoted investment income 22,733 16,964
Foreign unquoted investment income 4,599 16,393
Foreign dividend income 60 354
Other investment income:
UK unquoted investment income 685 774
Liquidity funds income 1,028 180
---------------------------------------------- ------------- ------------
Total investment income 29,105 34,665
---------------------------------------------- ------------- ------------
Total other income 154 167
---------------------------------------------- ------------- ------------
Total income 29,259 34,832
---------------------------------------------- ------------- ------------
Priority profit share charge against income:
Current year - HGT 7 LP (3,179) (4,981)
Current year - HGT 6 LP (1,835) (2,760)
Current year - HgCapital Mercury D LP (765) (3,765)
Current year - HGT LP (560) -
---------------------------------------------- ------------- ------------
Total priority profit share charge against
income (note 5(a)) (6,339) (11,506)
---------------------------------------------- ------------- ------------
Total net income 22,920 23,326
---------------------------------------------- ------------- ------------
5. Priority profit share and carried interest
(a) Priority profit share payable to Revenue return
General Partners
--------------------------------------------
2017 2016
GBP'000 GBP'000
-------------------------------------------- -------------- -------------
Priority profit share payable:
Current year amount 7,711 7,650
Less: Current year loans advanced to
General Partners (1,882) (448)
Add: Prior year loans recovered from
General Partners 510 4,304
-------------------------------------------- -------------- -------------
Current year charge against income 6,339 11,506
-------------------------------------------- -------------- -------------
Total priority profit share charge against
income 6,339 11,506
-------------------------------------------- -------------- -------------
The priority profit share payable on HGT LP, HGT 6 LP, HGT 7 LP, HGT 8 LP, HgCapital Mercury D LP and HGT Mercury 2 LP 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 the Company in its capacity as a Limited Partner. The net income of HGT LP, HGT 6 LP, HGT 7 LP, HGT 8 LP, HgCapital Mercury D LP and HGT Mercury 2 LP earned during the year, after the deduction of the priority profit share, is shown on the income statement. Details of these arrangements are disclosed in the Directors' report on page104 of the full Annual Report and Accounts.
Fund partnership Priority profit share
------------------ ------------------------------------------
HGT 8 LP 1.75% on the fund commitment during the
investment period
(commenced 1 October 2017).
HGT Mercury 1.75% on the fund commitment during the
2 LP investment period
(commenced 1 October 2017).
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 (previously 1.75% of the
fund commitment during the investment
period that ended 30 September 2017).
HgCapital Mercury 1.5% of original cost of investments
D LP in the fund less the original cost of
investments that have been realised or
written-off (previously 1.75% of the
fund commitment during the investment
period that ended 30 September 2017).
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 LP 0.5% on the value of investments in fund,
excluding co-investments (from 1 March
2017, previously 1.5% on the value of
investments, excluding co-investments).
------------------ ------------------------------------------
The terms of the above priority profit share arrangements during 2017 were:
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 1.25% of lesser of value or cost of investments.
Power Partners
2 C LP
Asper Renewable 1.5% of original cost of investments
Power Partners in the fund, less the original cost of
LP investments that have been realised or
written-off.
----------------- -------------------------------------------------
In addition, priority profit shares are payable on partnerships where the Company is a minority limited partner. These amounts are initially and indirectly funded by the Company through the amounts invested in these partnerships and these amounts are recognised as unrealised losses in the capital account in the income statement.
(b) Priority profit share loans to General Capital return
Partners
--------------------------------------------
2017 2016
GBP'000 GBP'000
-------------------------------------------- ------------- -------------
Movements on loans to General Partners:
Losses on current year loans advanced
to General Partners (1,882) (448)
Gains on prior year loans recovered
from General Partners 510 4,304
-------------------------------------------- ------------- -------------
Total (losses)/gains on priority profit
share loans
(advanced to)/recovered from General
Partners (1,372) 3,856
-------------------------------------------- ------------- -------------
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 the Company. 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
------------------------------------------
2017 2016
GBP'000 GBP'000
------------------------------------------ ------------- -------------
Carried interest provision:
Current year amount provided 26,629 27,076
------------------------------------------ ------------- -------------
Total carried interest charge against
capital gains (note 13) 26,629 27,076
------------------------------------------ ------------- -------------
The carried interest payable ranks as a first appropriation of capital gains on the investments held in HGT LP, HGT 6 LP, HGT 7 LP, HGT 8 LP, HgCapital Mercury D LP and HGT Mercury 2 LP, limited partnerships established solely to hold the Company's investments, and is deducted prior to such gains being paid to the Company in its capacity as a Limited Partner. The net amount of capital gains of HGT LP, HGT 6 LP, HGT 7 LP, HGT 8 LP, HgCapital Mercury D LP and HGT Mercury 2 LP 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 104 of the full Annual Report and Accounts, state that carried interest is payable once a certain level of repayments have been made to the Company. Based on the repayments, no carried interest was payable in respect of the current or prior financial year. However, 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 GBP82,911,000 will be 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 the Company's investment in the other fund limited partnerships.
6. Other expenses
Revenue return
(a) Operating expenses 2017 2016
GBP'000 GBP'000
--------------------------------------------- ------------- ------------
Registrar, management and administration
fees 721 711
Directors' remuneration (note 8) 216 206
Legal and other administration costs(1) 1,004 760
--------------------------------------------- ------------- ------------
1,941 1,677
--------------------------------------------- ------------- ------------
Fees payable to the Company's auditor
in relation to the Company:
Fees payable to the Company's auditor
for audit services 68 67
Fees payable to the Company's auditor
for tax compliance services - 28
--------------------------------------------- ------------- ------------
Total fees payable to the Company's auditor 68 95
--------------------------------------------- ------------- ------------
Total other expenses 2,009 1,772
--------------------------------------------- ------------- ------------
(1) Includes employer's National Insurance contributions of GBP24,113 (2016: GBP22,831).
Revenue return
(b) Finance costs 2017 2016
GBP'000 GBP'000
----------------------------------------- ------------- ------------
Interest paid 62 114
Non-utilisation fees and other expenses 763 519
Arrangement fees - 200
----------------------------------------- ------------- ------------
Total finance costs 825 833
----------------------------------------- ------------- ------------
7. Cash flow from operating activities
Reconciliation of net return before finance 2017 2016 costs and taxation GBP'000 GBP'000 to net cash flow from operating activities ---------------------------------------------- ---------- ---------- Net return before finance costs and taxation 129,277 102,077 Gains on investments held at fair value (138,826) (103,743) Increase in carried interest provision 26,629 27,076 Increase in accrued income from liquidity funds (1,020) (143) Increase in prepayments, accrued income and other debtors (5,815) (613) Increase/(decrease) in creditors 1,214 (2,068) Taxation paid (469) (825) ---------------------------------------------- ---------- ---------- Net cash inflow from operating activities 10,990 21,761 ---------------------------------------------- ---------- ----------
8. Directors' remuneration
The aggregate remuneration of the Directors for the year to 31 December 2017 was GBP215,500 (2016: GBP206,000). Further information on the Directors' remuneration is disclosed in the Directors' remuneration report on pages 104 and 105 of the full Annual Report and Accounts.
9. Taxation on ordinary activities
In the opinion of the Directors, the Company 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 reflected in the capital return during the year. The Company 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 the Company at 31 December 2017.
The effective pro-rata rate of corporation tax in the UK for a large company was 19.25% during the year (2016: standard tax rate of 20%). However, the tax charge in the current and prior year was lower than the standard and effective pro-rata 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 2017 2016
GBP'000 GBP'000
--------------------------------------------- ------------- ------------
Current tax:
UK corporation tax 3,305 4,005
Income streaming relief (3,305) (3,434)
Prior year adjustment (103) (149)
--------------------------------------------- ------------- ------------
Current revenue tax (credit)/charge for
the year (103) 422
--------------------------------------------- ------------- ------------
Deferred tax:
Reversal of timing differences 146 159
--------------------------------------------- ------------- ------------
Total deferred tax charge for the year
(note 9(c)) 146 159
--------------------------------------------- ------------- ------------
Total taxation charge 43 581
--------------------------------------------- ------------- ------------
Revenue return
(b) Factors affecting current tax charge 2017 2016
for the year GBP'000 GBP'000
--------------------------------------------- ------------- ------------
Net revenue return before taxation 20,086 20,721
--------------------------------------------- ------------- ------------
UK corporation tax charge at 19.25% thereon
(2016: 20%) 3,867 4,144
--------------------------------------------- ------------- ------------
Effects of:
Tax relief from interest distribution (3,305) (3,434)
Impact of change in tax rates 45 20
Tax relief from expenses allocated to (461) -
capital
Prior year tax adjustment (103) (149)
--------------------------------------------- ------------- ------------
Total differences (3,824) (3,563)
--------------------------------------------- ------------- ------------
Total taxation charge 43 581
--------------------------------------------- ------------- ------------
Revenue return
(c) Deferred tax 2017 2016
GBP'000 GBP'000
------------------------------------------- ------------- ------------
Deferred tax:
Movement in taxable income not recognised
in revenue return 146 159
------------------------------------------- ------------- ------------
Total deferred tax charge for the year
(note 9(a)) 146 159
------------------------------------------- ------------- ------------
Deferred tax recoverable:
Recoverable deferred tax at 31 December 509 668
Deferred tax charge for the year (146) (159)
------------------------------------------- ------------- ------------
Recoverable deferred tax at end of year
(note 14) 363 509
------------------------------------------- ------------- ------------
Deferred tax assets of GBP363,000 (2016: GBP509,000) are recognised at a rate of 19% (2016: 19.25%) in respect of the net amounts of taxable income that have not yet been recognised in the revenue return, but are expected to be recognised in the revenue return for the accounting period ending 31 December 2018, during which the standard corporation tax rate will be 19%.
10. Return and net asset value per Ordinary share
(a) Return per Ordinary Revenue return Capital return
share
---------------------------
2017 2016 2017 2016
--------------------------- --------------- --------------- ---------------- --------------
Amount (GBP'000):
Net return after taxation 20,043 20,140 108,366 80,523
--------------------------- --------------- --------------- ---------------- --------------
Number of Ordinary shares
('000):
Weighted average number
of shares in issue 37,325 37,325 37,325 37,325
--------------------------- --------------- --------------- ---------------- --------------
Return per Ordinary share
(pence) 53.70 53.96 290.33 215.74
--------------------------- --------------- --------------- ---------------- --------------
Capital return
(b) Net asset value per Ordinary share 2017 2016
GBP'000 GBP'000
-------------------------------------------- ------------- ------------
Amount (GBP'000):
Net assets 721,024 615,756
-------------------------------------------- ------------- ------------
Number of Ordinary shares ('000):
Number of Ordinary shares in issue 37,325 37,325
-------------------------------------------- ------------- ------------
Net asset value per Ordinary share (pence) 1,931.7 1,649.7
-------------------------------------------- ------------- ------------
11. Dividends on Ordinary shares
2017 2016
Record date Payment GBP'000 GBP'000
date
--------------------------------- -------------- ----------- -------- ---------
Interim Dividend of 16.0p 21 September 27 October 5,972 -
for the year ended 31 December 2017 2017
2017
Final Dividend of 46.0p for 6 April 15 May 17,169 -
the year ended 31 December 2017 2017
2016
Final Dividend of 40.0p for
the year ended 31 December 7 April 16 May
2015 2016 2016 - 14,930
--------------------------------- -------------- ----------- -------- ---------
Total equity dividends paid 23,141 14,930
-------------------------------------------------------------- -------- ---------
2017
GBP'000
-------------------------------------------------- -----------
Revenue available for distribution by way
of dividend for the year 20,043
Interim dividend of 16.0p for the year-ended
31 December 2017 (paid on 27 October 2017) (5,972)
Proposed dividend of 30.0p for the year-ended
31 December 2017
(based on 37,324,698 Ordinary shares in
issue at 31 December 2017) (11,197)
-------------------------------------------------- -----------
Undistributed revenue for Section 1159 purposes* 2,874
-------------------------------------------------- -----------
*Undistributed revenue comprises 13.5% of the estimated
total taxable income of GBP21,364,000.
The proposed final dividend of 30.0 pence per Ordinary share for the year ended 31 December 2017 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:
12. Fixed asset investments
2017 2016
GBP'000 GBP'000
---------------------------------------- --------- ---------
Investments held at fair value
through profit or loss:
Unquoted investments held in HGT
6 LP 131,901 229,986
Unquoted investments held in HGT
7 LP 245,698 175,957
Unquoted investments held in HGT 6,904
8 LP -
Unquoted investments held in HGT
LP 98,204 69,874
Unquoted investments held in HgCapital
Mercury D LP 59,048 54,828
Unquoted investments held in HGT 6,510 -
Mercury 2 LP
Other unquoted investments held
by the Company 25,622 32,598
---------------------------------------- --------- ---------
Total fixed asset investments gross
of carried interest provision 573,887 563,243
---------------------------------------- --------- ---------
Carried interest provision (note
5(c)) (82,911) (56,282)
---------------------------------------- --------- ---------
Total fixed asset investments 490,976 506,961
---------------------------------------- --------- ---------
Total fixed asset investments consist
of:
---------------------------------------- --------- ---------
Fund limited partnerships 490,976 506,961
---------------------------------------- --------- ---------
2017 2016
GBP'000 GBP'000
---------------------------------------------------------------------------------------------------------------------------------- ---------- ----------
Opening valuation as at 1 January 506,961 428,462
Opening unrealised appreciation
- investments (138,423) (48,039)
Opening carried interest provision 56,282 29,206
---------------------------------------------------------------------------------------------------------------------------------- ---------- ----------
Opening book cost as at 1 January 424,820 409,629
---------------------------------------------------------------------------------------------------------------------------------- ---------- ----------
Movements in the year:
Additions at cost 73,021 104,100
Disposals - proceeds (201,584) (102,193)
-
realised
gains on
sales 111,370 13,284
---------------------------------------------------------------------------------------------------------------------------------- ---------- ----------
Closing book cost of investments 407,627 424,820
---------------------------------------------------------------------------------------------------------------------------------- ---------- ----------
Add: closing unrealised appreciation
- investments 166,260 138,423
Less: closing carried interest provision (82,911) (56,282)
---------------------------------------------------------------------------------------------------------------------------------- ---------- ----------
Closing valuation of investments
as at 31 December 490,976 506,961
---------------------------------------------------------------------------------------------------------------------------------- ---------- ----------
The investments on notes above include investments in companies that are indirectly held by the Company through its investment in HGT LP, HGT 6 LP, HGT 7 LP, HGT 8 LP, HgCapital Mercury D LP and HGT Mercury 2 LP, as set out in note 3 on page 75, 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 2016, being the date of the last audited balance sheet, of these primary buyout funds were GBP77,982,000 (HGT LP), GBP273,301,000 (HGT 6 LP), GBP185,459,000 (HGT 7 LP) and GBP59,718,000 (HgCapital Mercury D LP). The first set of audited financial statements for HGT 8 LP and HGT Mercury 2 LP will be prepared for the year-ended 31 December 2017.
13. Gains/(losses) on investments and liquidity funds
Capital return
2017 2016
GBP'000 GBP'000
-------------------------------------------------------------------- ------------- ------------
Realised:
Realised gains/(losses) - fixed asset
investments 111,370 13,284
- liquidity funds 128 201
- aborted deal fees (1,261) -
- loan facility (66) -
-------------------------------------------------------------------- ------------- ------------
Net realised gains 110,171 13,485
-------------------------------------------------------------------- ------------- ------------
Unrealised:
Unrealised gains/(losses) - fixed asset
investments 27,837 90,384
- aborted deal fees (1,132) -
- liquidity funds (509) (126)
-------------------------------------------------------------------- ------------- ------------
26,196 90,258
-------------------------------------------------------------------- ------------- ------------
Carried interest charge against capital
gains (note 5(c)) (26,629) (27,076)
-------------------------------------------------------------------- ------------- ------------
Net unrealised (losses) / gains (433) 63,182
-------------------------------------------------------------------- ------------- ------------
Total gains 109,738 76,667
-------------------------------------------------------------------- ------------- ------------
14. Debtors and accrued income
2017 2016
GBP'000 GBP'000
-------------------------------------------------------------------------------------------- --------- ---------
Amounts receivable after one year:
-------------------------------------------------------------------------------------------- --------- ---------
Accrued income on fixed assets 71,107 65,280
-------------------------------------------------------------------------------------------- --------- ---------
Amounts receivable within one year:
Deferred tax recoverable (note 9(c)) 363 509
Prepayments and other accrued income 51 63
-------------------------------------------------------------------------------------------- --------- ---------
Total amounts receivable within
one year 414 572
-------------------------------------------------------------------------------------------- --------- ---------
Total debtors 71,521 65,852
-------------------------------------------------------------------------------------------- --------- ---------
The Directors consider that the carrying amount of debtors approximates their fair value.
15. Liquidity funds
2017 2016
GBP'000 GBP'000
---------------------------------------------------------------------------------------------- --------- ---------
Investments held at fair value through
profit and loss:
Opening valuation 39,590 30,835
Purchases at cost 166,409 88,737
Sales and redemptions (50,700) (80,200)
Movement in unrealised capital losses (509) (126)
Accrued income 1,020 143
Realised capital gains 128 201
---------------------------------------------------------------------------------------------- --------- ---------
Closing valuation 155,938 39,590
---------------------------------------------------------------------------------------------- --------- ---------
16. Movement in net funds
2017 2016
GBP'000 GBP'000
------------------------------------------------------------------------------------------ --------- ---------
Analysis and reconciliation of net
funds:
Change in cash (57) (4,316)
Net funds at 1 January 3,982 8,298
------------------------------------------------------------------------------------------ --------- ---------
Net funds at 31 December 3,925 3,982
------------------------------------------------------------------------------------------ --------- ---------
Net funds comprise:
------------------------------------------------------------------------------------------ --------- ---------
Cash 3,925 3,982
------------------------------------------------------------------------------------------ --------- ---------
17. Creditors - amounts falling due within one year
2017 2016
GBP'000 GBP'000
------------------------------------------------------------------------------- --------- ---------
Taxation payable 3 575
Loan facility (note 18) - 1,458
Accruals 1,762 794
------------------------------------------------------------------------------- --------- ---------
Total creditors 1,765 2,827
------------------------------------------------------------------------------- --------- ---------
The Directors consider that the carrying amount of creditors approximates their fair value.
18. Bank facility
On 24 August 2011, the Company 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, the Company 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 0.95% p.a. is liable on any undrawn commitment. The facility was undrawn as at the end of the year.
On 28 November 2012, HgCapital Mercury D LP, alongside the other Hg Mercury funds, entered into a four-year multi-currency revolving term loan facility to provide short-term funds to facilitate acquisitions. HgCapital Mercury D LP participated for an amount of GBP4,736,842. Under the facility agreement, it is liable to pay interest on any drawn amount at base rate plus a margin of 3.00%. A commitment fee of 0.50% p.a. is liable on any undrawn commitment. At the end of the year, the Company's indirect share of amounts drawn via HgCapital Mercury D LP, was GBPnil.
19. Financial risk
The following disclosures relating to the risks faced by the Company are provided in accordance with sections 11 and 12 of FRS 102. The reference to investments in this note is in relation to the Company'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 and HGT Mercury 2 LP as described in note 3 above.
Financial instruments and risk profile
The Company'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, the Company holds UK Government securities, cash, liquidity funds and items such as debtors and creditors arising directly from its operations. In pursuing its investment objective, the Company is exposed to a variety of risks that could result in either a reduction of the Company'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 the Company'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
The Company'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 the Company's portfolio is given above and a breakdown of the most significant underlying investments is given above. In accordance with the Company'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. The Company 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. The Company has exposure to interest rate movements, through bank deposits and liquidity funds.
In the opinion of the Directors, the diversified nature of the Company's investments significantly reduces the risks of investing in unquoted companies.
FRS 102 requires the Company 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 and loss:
Unquoted investments - Investment
in HGT 7 LP - - 245,698 245,698
- Investment in HGT 6 LP - - 131,901 131,901
- Investment in HGT LP - - 98,204 98,204
- Investment in HgCapital
Mercury
D LP - - 59,048 59,048
- Investment in Asper RPP
II
LP - - 16,709 16,709
- Investment in Hg 6 E LP - - 8,119 8,119
- Investment in HGT 8 LP - - 6,904 6,904
- Investment in HGT
Mercury 2
LP - - 6,510 6,510
- Investment in Asper RPP
I LP - - 794 794
- Liquidity funds - 155,938 - 155,938
- Carried interest
provision - - (82,911) (82,911)
- Uninvested capital in
limited
partnerships - - 429 429
------------------------------------------------------------------------- ---------- --------- --------- ---------
As at 31 December 2017 - 155,938 491,405 647,343
------------------------------------------------------------------------- ---------- --------- --------- ---------
Level Level Level Total
1 2 3 GBP'000
GBP'000 GBP'000 GBP'000
------------------------------------------------------------------------- ---------- --------- --------- ---------
Investments held at fair value
through profit and loss:
Unquoted investments - Investment
in HGT 6 LP - - 229,986 229,986
- Investment in HGT 7 LP - - 175,957 175,957
- Investment in HGT LP - - 69,874 69,874
- Investment in HgCapital
Mercury
D LP - - 54,828 54,828
- Investment in Asper RPP
II
LP - - 16,997 16,997
- Investment in Hg 6 E LP - - 14,448 14,448
- Investment in Asper RPP
I LP - - 1,153 1,153
- Liquidity funds - 39,590 - 39,590
- Carried interest
provision - - (56,282) (56,282)
- Uninvested capital in
limited
partnerships - - 2,198 2,198
------------------------------------------------------------------------- ---------- --------- --------- ---------
As at 31 December 2016 - 39,590 509,159 548,749
------------------------------------------------------------------------- ---------- --------- --------- ---------
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. The Company 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 2017 by class of financial instrument.
Investments
in limited
partnerships Total
2017 2017
GBP'000 GBP'000
------------------------------------------------------------------------------------------ -------------- ----------
Unquoted investments:
Opening balance 506,961 506,961
Purchases 73,021 73,021
Realisations at 31 December 2016
valuation (163,927) (163,927)
Total gains for the year included
in the income statement 101,550 101,550
Movement in carried interest
provision (26,629) (26,629)
------------------------------------------------------------------------------------------ -------------- ----------
Closing unrealised valuation of
level 3 investments 490,976 490,976
------------------------------------------------------------------------------------------ -------------- ----------
Total gains for the year included
in the income statement
for investments held at the end
of the year 91,803 91,803
------------------------------------------------------------------------------------------ -------------- ----------
Equity price risk
Equity price risk is the risk of a fall in the fair value of the Company's ownership interests (comprising equities and shareholder loans) held by the Company indirectly through its direct investments in fund limited partnerships. The Board revalues each investment twice each year. The Board manages the risks inherent in the Company'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 an impairment in value between regular valuations, it can revalue the investment. The Board also monitors Hg's compliance with the Company's investment objective and investment policy.
Hg's best estimate of the effect on the net assets and total return due to a reasonably possible change in the value of all unquoted securities, with all other variables held constant, is as follows:
NAV per
Ordinary
Change share
% GBP'000 Pence
----------------------------- ------- ---------- ----------
Sensitivity to equity price
risk:
----------------------------- ------- ---------- ----------
Unquoted investments +/-10% +/-56,208 +/-150.6
----------------------------- ------- ---------- ----------
Credit risk
Credit risk is the risk of financial loss in the event that any of the Company's market counterparties fail to fulfil their contractual obligations to the Company. The Company's financial assets (excluding fixed asset investments) that are subject to credit risk, were neither impaired nor overdue at the year-end. The Company's cash balances were held with the Royal Bank of Scotland 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 the Company 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 the Company's investments on an ongoing basis.
Currency risk and sensitivity
The Company 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 the Company'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 the Company's exposure to the value of its investments, rather than the gross value. From time to time, the Company 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 the Company'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 the Company'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.
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 the Company's holdings changes through the purchase and realisation of investments to meet the Company's objectives.
Revenue return Capital return
--------------------------------
NAV per NAV per
Ordinary Ordinary
share share
GBP'000 Pence GBP'000 Pence
-------------------------------- -------------- ---------------- --------------- ---------------
Highest value against sterling
during the year:
Danish krone (8.0106) - - 47 0.1
Euro (1.0768) 701 1.9 6,979 18.7
New Zealand dollar (1.6997) - - 397 1.1
Norwegian krone (10.0047) - - 10,278 27.5
Swedish krona (10.2535) 151 0.4 169 0.5
Swiss franc (1.2197) - - 13 -
US dollar (1.2065) 943 2.5 12,125 32.5
-------------------------------- -------------- ---------------- --------------- ---------------
Potential gain if sterling
depreciates 1,795 4.8 30,008 80.4
-------------------------------- -------------- ---------------- --------------- ---------------
Lowest value against sterling
during the year:
Danish krone (8.8945) - - (57) (0.2)
Euro (1.1956) (875) (2.3) (8,704) (23.3)
New Zealand dollar (1.9725) - - (119) (0.3)
Norwegian krone (11.2398) - - (1,512) (4.1)
Swedish krona (11.5354) (75) (0.2) (84) (0.2)
Swiss franc (1.3324) - - (2) -
US dollar (1.3595) (38) (0.1) (489) (1.3)
-------------------------------- -------------- ---------------- --------------- ---------------
Value at risk if sterling
appreciates (988) (2.6) (10,967) (29.4)
-------------------------------- -------------- ---------------- --------------- ---------------
At 31 December 2017, the following rates were applied to convert foreign denominated assets into sterling: Danish krone (8.3876); euro (1.1266); New Zealand dollar (1.9021); Norwegian krone (11.0646); Swedish krona (11.0756); Swiss franc (1.3182); and US dollar (1.3528).
Hedging
At times, the Company 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 the Company are denominated in the foreign currency of the geographic areas in which the Company 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.
The Company 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. The Company does not adopt hedge accounting in the financial statements.
Interest rate risk and sensitivity
The Company 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. The Company 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 the Company has no borrowings and maintains low cash levels, the Company'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 the Company 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 GBP250,000, 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 the Company's investments, may not be as readily realisable as investments in quoted companies, which might result in the Company having difficulty in meeting its obligations. Liquidity risk is currently not significant as 22% of the Company's net assets at the year-end are liquid resources and, in addition, the Company has an GBP80 million multi-currency undrawn bank facility available. The Board gives guidance to Hg as to the maximum amount of the Company's resources that should be invested in any one company. For further details refer to the Company's Investment Policy above.
Currency and interest rate exposure
The Company's financial assets that are subject to currency and interest rate risk are analysed below:
2017 2016
Fixed
Fixed Non- and Non-
and floating interest- floating interest-
rate bearing Total Total rate bearing Total
GBP'000 GBP'000 GBP'000 % GBP'000 GBP'000 GBP'000
-------------- -------------- ----------- --------- ------ ---------- ----------- ---------
Sterling 160,292 182,885 343,177 47.5 45,770 244,518 290,288
Euro - 165,980 165,980 23.0 - 150,396 150,396
US dollar - 107,724 107,724 14.9 - 67,346 67,346
Norwegian
krone - 97,009 97,009 13.4 - 66,217 66,217
Swedish
krona - 3,991 3,991 0.6 - 11,428 11,428
New Zealand
dollar - 3,335 3,335 0.5 - - -
Danish krone - 997 997 0.1 - 32,141 32,141
Swiss franc - 162 162 - - 195 195
-------------- -------------- ----------- --------- ------ ---------- ----------- ---------
Total 160,292 562,083 722,375 100.0 45,770 572,241 618,011
-------------- -------------- ----------- --------- ------ ---------- ----------- ---------
Short-term debtors and creditors, which are excluded, are mostly denominated in sterling, the functional currency of the Company. 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.
Through its investment into the HgCapital Mercury D LP fund, the Company had outstanding borrowings of GBPnil (notes 17 and 18) at the year-end (2016: GBP1,458,000). The numerical disclosures above exclude short-term debtors and creditors.
Capital management policies and procedures
The Company'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.
The Company's capital at 31 December comprised:
2017 2016
GBP'000 GBP'000
-------------------------------------------------------------------------------------------- --------- ---------
Equity:
Equity share capital 9,331 9,331
Share premium 120,368 120,368
Capital redemption reserve 1,248 1,248
Retained earnings and other reserves 590,077 484,809
-------------------------------------------------------------------------------------------- --------- ---------
Total capital 721,024 615,756
-------------------------------------------------------------------------------------------- --------- ---------
With the assistance of Hg, the Board monitors and reviews the broad structure of the Company'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 the Company 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.
The Company's objectives, policies and processes for managing capital are unchanged from the preceding accounting period.
20. Called-up share capital
2017 2016
-------------------------------
No. '000 GBP'000 No. '000 GBP'000
------------------------------- --------- -------- --------- --------
Ordinary shares of 25p
each:
Allotted, called-up and
fully paid:
At 1 January 37,325 9,331 37,325 9,331
------------------------------- --------- -------- --------- --------
At 31 December 37,325 9,331 37,325 9,331
------------------------------- --------- -------- --------- --------
Total called-up share capital 37,325 9,331 37,325 9,331
------------------------------- --------- -------- --------- --------
Whilst the Company 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 2017 120,368 1,248 81,061 366,592 37,156
Transfer on disposal
of investments - - (73,713) 73,713 -
(Losses)/gains on liquidity
funds - - (509) 128 -
Realised losses on - - - (66) -
loan facility
Losses on aborted deal
fees - - (1,132) (1,261) -
Net gain on sale of - - - 37,657 -
fixed asset investments
Net movement in unrealised - - 101,550 - -
appreciation
of fixed asset investments
Dividends paid - - - - (23,141)
Net return for the
year after taxation - - - - 20,043
Net loans advanced - - (1,372) - -
to General Partners
Carried interest provision - - (26,629) - -
----------------------------- --------- ------------ ------------ ---------- ---------
As at 31 December 2017 120,368 1,248 79,256 476,763 34,058
----------------------------- --------- ------------ ------------ ---------- ---------
22. Commitment in fund partnerships and contingent liabilities
Outstanding at
31 Dec
---------------------------------- --------------
Original
commitment 2017 2016
Fund GBP'000 GBP'000 GBP'000
---------------------------------- -------------- -------------- --------------
HGT 8 LP(1) 350,000 341,084 350,000
HGT Mercury 2 LP(1) 80,000 73,306 -
HGT 7 LP 200,000 - 39,774
HGT 6 LP 285,029 17,174 11,050
Hg Mercury D LP 60,000 6,182 10,285
Asper RPP II LP 35,505(2) 8,354(3) 7,482(3)
HGT LP(4) 120,000 1,261 1,261
Asper RPP I LP 19,208(5) 796(6) 846(6)
Hg 6 E LP 15,000 940 582
---------------------------------- -------------- -------------- --------------
Total outstanding commitments 449,097 421,280
---------------------------------- -------------- -------------- --------------
(1) The Company has the benefit of an opt-out provision
in connection with its commitment alongside Hg 8
and Hg Mercury 2, allowing it to opt out of its obligation
to fund draw-downs under its commitment, without
penalty, where certain conditions exist.
(2) Sterling equivalent of EUR40,000,000.
(3) Sterling equivalent of EUR9,412,000 (2016: EUR8,765,000).
(4) 21.4% of the original GBP120 million commitment
to the HgCapital 5 fund has subsequently been cancelled,
as the Manager deemed that it was unlikely to be
required.
(5) Sterling equivalent of EUR21,640,000.
(6) Sterling equivalent of EUR897,000 (2016: EUR992,000).
23. Key agreements, related party transactions and ultimate controlling party
Hg acts as Manager of the Company 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 the Company invests. In addition, Hg acts as Administrator of the Company.
The Company has no ultimate controlling party.
The Company's related parties are its directors. Fees paid to the Company's board are disclosed in the Directors' Remuneration Report on page 117 of the full Annual Report and Accounts. There are no other identified related parties at the year end, and as of 2 March 2018.
24. Post Balance Sheet Events
Since 31 December 2017, the Board has approved two further investment commitments, totalling GBP150 million. These are described in the Chairman's statement above.
Independent auditor's report
to the members of HgCapital Trust plc
The Company's financial statements for the year ended 31 December 2017 have been audited by Grant Thornton LLP. The text of the Auditor's Report can be found on pages 95 to 99 of the full Annual Report and Accounts.
Extract from the Directors' report
The Directors present the Annual Report and Accounts of HgCapital Trust plc (the 'Company') (Reg. No. 1525583) for the year ended 31 December 2017.
The Strategic Report, Chairman's Statement and Corporate Governance Report form part of this Directors' Report.
Results and dividend
The total return for the Company is set out in the income statement above. The total return after taxation for the year, was GBP128,409,000 (2016: GBP100,663,000) of which the revenue return was GBP20,043,000 (2016: revenue return of GBP20,140,000).
Following payment of an interim dividend of 16 pence per Ordinary share in October 2017, the Directors recommend the payment of a final dividend of 30 pence per Ordinary share for the year ended 31 December 2017, making a total of 46.0 pence (2016: 46.0 pence). Subject to approval of this dividend at the forthcoming Annual General Meeting ('AGM'), it will be paid on 27 April 2018 to shareholders on the register of members at the close of business on 3 April 2018.
Stewardship
Our Manager, Hg, seeks to invest the Company's funds in businesses that are well managed, with high standards of corporate governance.
The Directors of the Company 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 the Company'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 19 to 70 of the full Annual Report and Accounts.
Greenhouse gas emissions
The Company has no greenhouse gas emissions to report from the operations of the Company, nor does it have responsibility for any other emissions producing sources reportable under the Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013.
Financial Instruments
The Company had no outstanding derivative contracts at 31 December 2017. Note 19 to the financial statements describes the financial risk management objectives and the Company's exposures to credit risk and liquidity risk.
Annual General Meeting ('AGM')
The AGM of the Company, which will include a presentation by Hg, will be held at the offices of Hg, 2 More London Riverside, London SE1 2AP on Monday 23 April 2018 at 11.00 a.m. Light refreshments will be available from 10.30 a.m. Notice of the AGM is given on pages 130 to 137 of 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 the Company and its shareholders. The Directors therefore recommend that shareholders vote in favour of resolutions 1 to 15, as set out in the Notice of Meeting.
Director's responsibilities 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 the Company and of the profit or loss of the Company 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 the Company'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 the Company 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 the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company 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 the Company 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 complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Responsibility statement
We confirm that to the best of our 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 the Company 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 the Company, together with a description of the principal risks and uncertainties that it faces.
We 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 the Company's performance, business model and strategy.
On behalf of the Board
Roger Mountford, Chairman
2 March 2018
Dividend
The final dividend proposed in respect of the year ended 31 December 2017 is 30 pence per share.
Ex-dividend date (date from which shares are transferred without dividend) 29 March 2018
Record date (last date for registering transfers to receive the dividend) 3 April 2018
Last date for registering DRIP instructions (see below)
6 April 2018
Dividend payment date 27 April 2018
The final dividend is subject to approval of the shareholders at the forthcoming AGM.
Directors:
Roger Mountford
Richard Brooman
Peter Dunscombe
Mark Powell
Jim Strang*
Guy Wakeley*
Anne West
*To be appointed with effect from 5 March 2018.
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
Neither the contents of the Company's website or the Manager's website, nor the contents of any website accessible from hyperlinks in this announcement or on those websites (or any other website), is incorporated into, or forms part of, this announcement.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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