How HgCapital Trust Outperforms the Market:

An In-Depth Look at Its Resilient Business Model

HgCapital Trust (HgT) isn’t your average investment trust. As a leader in private equity focused on high-growth, unquoted software and services businesses, HgT has carved out a distinctive niche in the financial world. But what truly sets it apart? It’s not just its focus on long-term returns that outperform the FTSE All-Share Index. It’s the robust strategies and thoughtful diversification at its core.

What if there was a way to decode its success—understanding how it generates consistent profitability, mitigates risks, and seizes opportunities even in volatile markets? That’s precisely what we’ll explore.

The Foundations of HgCapital Trust’s Business Model

At the heart of HgT lies a simple yet powerful principle: investing in quality over quantity. Its concentrated portfolio of high-margin software and service businesses forms the backbone of its strategy. Unlike many investment vehicles chasing short-term gains, HgT prioritizes businesses that deliver predictable cash flows and long-term growth.

Consider this: 76% of HgT’s portfolio value comes from just 20 investments. This concentrated approach might seem risky at first glance, but HgT’s secret weapon is in its sectoral and geographic focus.

Why Software and Services?

Software and services aren’t just buzzwords—they’re economic lifelines. These sectors provide:

• Recurring revenues through subscription-based models, ensuring predictable cash flows.

• High customer retention rates, as businesses rarely switch providers for critical tools.

• EBITDA margins of over 30%, which contribute significantly to profitability.

This isn’t speculation. HgT’s portfolio companies showed a staggering 30% EBITDA growth year-over-year in 2023, even during market volatility. Imagine a ship steadying through the storm while others flounder—that’s the resilience of their chosen sectors.

A Global Perspective

HgT doesn’t just invest anywhere—it focuses on Europe and North America. These regions dominate its portfolio for two reasons:

1. Demand for automation and digital transformation: As businesses seek efficiency, the appetite for cutting-edge solutions grows exponentially.

2. Risk diversification: By spreading investments across stable economic environments, HgT minimizes exposure to localized market shocks.

However, geographic diversification isn’t without challenges. Currency fluctuations and varying regulations can introduce complexity. But HgT counters these with its targeted sectoral approach, ensuring stability and growth.

A Revenue Model That Promises Stability

Subscription-based revenues form the crux of HgT’s investments. Imagine you’re running a business: Would you prefer erratic, one-off sales or the certainty of monthly recurring revenues? HgT chooses the latter, and this choice creates:

• Steady income streams.

• Long-term contracts that reduce churn.

• Businesses with deep customer relationships that competitors find hard to break.

This predictability ensures that even in uncertain times, HgT’s portfolio remains robust.

Profitability, Growth, and the Secret Sauce Behind HgT’s Success

When it comes to financial metrics, HgT is in a league of its own. But what drives its profitability and growth?

High-Margin Sectors as a Pillar of Profitability

Consider this: More than 90% of HgT’s portfolio revenue comes from software and services, with EBITDA margins exceeding 30%. High margins aren’t just numbers—they’re a reflection of efficiency and scalability. Software companies, for instance, can sell the same product repeatedly without substantial incremental costs, while service businesses often scale efficiently with demand.

HgT doesn’t merely ride market trends; it strategically invests in mission-critical industries like healthcare IT, financial technology, and legal compliance. These sectors are evergreen, addressing problems that businesses can’t afford to ignore.

Revenue Growth Driven by Strategic Playbooks

HgT isn’t just sitting on its investments—it actively grows them. In 2023, portfolio companies recorded an impressive 25% year-over-year revenue growth, driven by:

• Organic expansion: This steady growth ranged between 10% and 15% annually, fueled by innovative products and strong customer bases.

• Mergers and acquisitions (M&A): Acquiring complementary businesses enhanced capabilities and market reach.

Even more compelling are HgT’s investment exits. The trust has a knack for selling its stakes at the right time, generating average returns 25% higher than the carrying value. Imagine buying a property, renovating it strategically, and selling it for a substantial profit—that’s HgT’s approach to its portfolio.

Managing Risks: A Balanced Financial Structure

Debt can be a double-edged sword, but HgT manages it masterfully. Its portfolio companies maintain an average net debt-to-EBITDA ratio of 7.4x—a balance that funds growth without overleveraging. This ensures financial health while enabling expansion.

Diving Into HgT’s Star Investments

HgT’s top 20 investments showcase its strategic brilliance. Let’s spotlight a few standout companies that form the trust’s backbone:

• Visma (9.4% of NAV): A titan in business software, Visma serves over 1.7 million paying customers across Europe. Its SaaS model ensures recurring revenues, while acquisitions bolster its innovation pipeline.

• The Access Group (13.3% of NAV): Specializing in enterprise resource planning (ERP) solutions, this UK-based company serves 60,000+ businesses. Its robust recurring revenue growth underscores HgT’s focus on predictability.

• Sovos (2.4% of NAV): Managing global tax compliance is no small feat. Sovos helps multinational corporations navigate this complexity, making it an invaluable asset in HgT’s portfolio.

Each of these companies exemplifies HgT’s strategy: focus on industries where switching costs are high, revenues are recurring, and customer relationships are deeply embedded.

Challenges and HgT’s Strategic Response

Of course, no business model is without its risks. HgT faces challenges such as:

• Currency fluctuations from its geographic diversity.

• Regulatory hurdles across different markets.

How does HgT stay ahead? By targeting sectors relatively immune to these risks. Automation and digital transformation, for example, aren’t dependent on local regulations—they’re global necessities.

Moreover, HgT’s investment philosophy emphasizes resilience. Companies in its portfolio aren’t just profitable; they’re indispensable to their clients. This focus ensures that even during economic downturns, HgT’s investments remain strong.

A Vision for the Future

HgCapital Trust is more than an investment vehicle—it’s a blueprint for sustainable, long-term growth. By concentrating on high-margin sectors, ensuring revenue predictability, and diversifying geographically, it has built a model that thrives on resilience and opportunity.

The financial world is often unpredictable, but HgT offers a compelling case for navigating this uncertainty with precision and foresight. Its ability to consistently deliver superior returns isn’t just luck; it’s the result of a carefully crafted strategy.

So, the next time you wonder how private equity players manage to outperform, remember this: it’s all about focus, strategy, and resilience. And HgCapital Trust? It’s leading the charge.