Share Prices & Company Research

News

22 July 2022

The HG Capital Trust: Small & Mid-Cap Private Market Resilience

The HG Capital Trust (HGT) is a FTSE 250 listed investment trust managed by private equity company HG Capital. The trust provides UK investors with diversified exposure to HG’s private institutional funds that focus on private small and mid-cap businesses in which HG has taken a controlling stake.

Our reasons for choosing to write about the HG Capital Trust are twofold. Firstly, in line with the focus of the May 2022 issue of Market Insight, the investment vehicle provides exposure to a diversified portfolio of high-quality small & mid-cap businesses domiciled in the UK, Europe and the US. Secondly, we believe the approach HG takes to investing in private markets to be rather distinct, focusing specifically on technological businesses with support going beyond supplying financial capital, as HG utilises its controlling stake to provide consultant like support.

To begin on the second point, the focus of the strategy has not always been on technology or, more specifically, industrial software and services businesses. This change was decided upon around a decade ago when HG recognised the likely future dominance of these businesses, and the value HG could offer by specialising within a particular discipline. The belief in the future success of technology businesses was driven by Moore’s Law which states we can expect the speed and capability of computers to increase every couple of years, while the general cost of computers simultaneously falls. Gordon E. Moore, the co-founder of Intel, made this observation in 1965 and through the rapid development witnessed over recent decades it cannot be disputed.

By focusing on businesses set to benefit from technological progression, HG has been able to build a portfolio of resilient compounding businesses. Over the past decade, the Trust has delivered a total return of c.350% with relatively low levels of volatility, highlighting both the upside potential and resilient nature of the portfolio.
While HG has demonstrated a strong ability to select businesses with significant upside potential, the true value added is provided via the development support it provides. By specialising in industrial software and service businesses HG has been able to build significant expertise and experiences from which investment partners can benefit. Managing Partner Matthew Brockman likens the HG infrastructure to an investor ecosystem where businesses can learn from one another through “copying each other’s homework.” This focus on identifying synergies and facilitating strategic partnerships is what HG believes makes it such an effective owner as it provides businesses with scale-up opportunities that would otherwise not be possible.

When evaluating investment opportunities, HG is not constrained by top-down asset allocation. Instead, the focus is purely on those investments that offer the most attractive potential for performance improvement. A core focus for HG has been on businesses that provide low spend business-critical software that has high levels of subscription/repeat revenues. In other words, businesses that deliver software that may be considered relatively mundane when compared to the emerging technologies of today, but once integrated within a business become mission-critical in delivering upon strategic goals. These businesses tend to be characterised by high levels of customer retention, low levels of customer concentration and the ability to scale up rapidly.
The mission-critical nature significantly reduces its sensitivity to economic cycles as, even during recessionary periods, the integrated nature of this software means they are costs a business cannot simply forgo. As we have witnessed over the course of this year, uncorrelated resilience is a vital tool for investors to protect against unexpected volatility. The resilient nature of the portfolio can be witnessed in the year-to-date performance figures where the portfolio delivered reduced downside risk relative to the MSCI World Index, highlighting that even during periods of uncertainty and high inflation, such software remains critical to business operations.

This article was taken from the May 2022 issue of Market Insight. To subscribe to our investment publications, please visit www.redmayne.co.uk/publications.
 
Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. The value of investments and any income derived from them may go down as well as up and you could get back less than you invested.
The HG Capital Trust: Small & Mid-Cap Private Market Resilience

More News Stories

Market Round Up
12 August 2022
Deere & Co
10 August 2022
Think Small
03 August 2022
SUBSCRIBE TO OUR PUBLICATIONS
We offer complimentary investment publications produced by our in-house Investment Research team. Please click here to view our range.