Transcript
Speaker: Hello and welcome to Uncovering Trusts, a podcast by Edison Group. I'm your host, Liam Eberne, and today I'm joined by Milos Papps, Director of Investment Company Content at Edison, to talk about HGT.
Speaker: Milos, thanks for joining us today. Thanks, Liam. Good to be here, as always. AGT's underlying portfolio continued to grow strongly and NAV stabilized in the second quarter despite lower public software valuations following the sharp sell-off in early 2026 as you know investors worried about AI disruption, um which also led to AGT's share price decline.
Speaker: um So I think that half-year results give us a useful way to separate what has happened to market sentiment from what has happened inside the businesses. And before we get into the results, could you perhaps give listeners a quick reminder of what HTT invests in?
Speaker: Yes, of course, Liam. HGT is a listed private equity investment company managed by HG, a specialist technology investor with more than $110 billion dollars of assets under management.
Speaker: At the end of June, HGT gave shareholders exposure to more than 60 unquoted businesses with um an aggregate enterprise value of more than $195 billion. dollars um The portfolio is concentrated in mission-critical business-to-business software and technology-enabled services across um areas such as tax and accounting, um enterprise resource planning and payroll, legal and compliance, as well as insurance and healthcare IT, among others.
Speaker: ah These products are deeply embedded in customer workflows, have high recurring revenues, and so typically represent a small part of the customer's cost base. Now getting into the results, what were the headline numbers? Yeah, so the contrast between the share price and the NAV was substantial as AGT's share price fell almost 25% on a total return basis in the first half, while the NAV total return was down 4.9%.
Speaker: Now, the NAV decline was concentrated in the first quarter when it fell 5.4%, while the second quarter was broadly flat with an 0.5% positive return as public software valuation stabilized.
Speaker: Now, at portfolio level, um strong trading added around 11 percentage points to value in the first half. um That was more than offset by a 13 point drag a sorry thirteen yeah point drag from lower valuation multiples, while um higher net debt reduced value by further roughly two points.
Speaker: I would note that the weighted average EBITDA multiple across the portfolio fell from 25.2 times um at the end of 2025 to 22.9 times in the end of June.
Speaker: So the main driver of the NAV decline was the market's reassessment of software valuations rather than a deterioration in portfolio trading. And what did the operating performance look like underneath those valuation movements?
Speaker: um It remains strong. On the last 12 month basis, portfolio revenue grew 16%, including 11% organically, while EBITDA grew 19%, including 17% organically.
Speaker: ah The average EBITDA margin was a healthy 34%.
Speaker: Those figures are broadly in line with the portfolio's recent performance and suggest that the businesses have continued to comp compound earnings despite the much weaker public market sentiment.
Speaker: There was also some improvement in leverage. Average net debt to EBDA fell to 6.9 times at the end of June from 7.4 times at the end of 2025. That is still high in absolute terms, but it is supported by the portfolio's high share of recurring revenues, strong earnings growth and cash generation.
Speaker: I would also note that more than 80% of portfolio debt maturities have been extended to 2029 and beyond. Now, the share price moved much more than the NEV. Has that gap started to close? Well, AGTs ended June at a discount of around 29% to NAV and by the time of recording this episode that had marginally narrowed.
Speaker: But the listed software back but backdrop improved. In Q2 the recovery was led mainly by you know network and cybernames, but in the third quarter it broadened to many business-to-business software and application companies.
Speaker: By the 10th of September, the software ETF tracked by HD was only 4% down year-to-date. That broadening matters because I believe that the market is starting to differentiate between potential AI beneficiaries and businesses seen as more exposed to disruption. HDT's own shares have recovered more slowly, so the discount remains wide despite the better software backdrop providing scope for further narrowing.
Speaker: Now, AI has clearly been at the centre of that sentiment. Why do you think HGT's portfolio is better placed than the software sector as a whole? AHG's starting point is that not all software faces the same risk.
Speaker: um For instance, software that mainly displays or organizes information may be more vulnerable as AI does more of that work directly. AHG instead focuses on businesses that have and that's execute complex, often regulated workflows where accuracy, compliance and auditability matter.
Speaker: h HG summarizes this through what it calls the four Ds, data, domain, distribution, and deterministic workflows. I broadly agree with this view as many small and medium-sized enterprises are not set up to build and and maintain their own AI-enabled software for mission-critical processes.
Speaker: So I think trusted incumbents with propriety data and deep domain expertise have an advantage. um The challenge is to become the trusted system of action in each niche rather than seed that layer to horizontal platforms.
Speaker: And how much practical progress is there behind that thesis? There is now a lot of activity across the portfolio. um As of June 2026, more than 1,600 AI projects were live across AG's portfolio with $260 million dollars of budgeted impact.
Speaker: um More than 100 Identic products and features had been launched to customers and AG Catalyst had directly supported more than 30 AI product builds.
Speaker: um AG also has more than 150 AI and data specialists across its internal and external teams. I would note that HG Catalyst had can put specialist teams inside the portfolio company to redesign the workflow and build an AI-native product, then share what works across the wider portfolio.
Speaker: um I would also note the recently announced a new strategic venture to work with Anthropic to bring cloud's agentic capabilities to the AGG portfolio and drive material value creation.
Speaker: That scale is difficult for many mid-market software companies to reproduce on their own. um What matters now is commercial adoption, and there are some encouraging examples among AGG's largest holdings.
Speaker: Can you give an example of that from the larger holdings? Yes, Liam. So Visma and IFS are AGT's two largest positions, together representing 22% of portfolio value at the end of June.
Speaker: Visma's annual recurring revenue, or ARR, reached 3.1 billion ah euros in the first half of the year, which is up 19% year-on-year and 13% organically, while its customer base grew 30% year-on-year to 2.7 million.
Speaker: ah Importantly, 40% of group ARR now comes from customers with access to embedded AI features. And then IFRS reported 25% year-in-year ARR growth in the first half of 2026, with recurring revenue at 84% of total revenue, um driven by new customer wins and greater adoption of its industrial AI offerings.
Speaker: I know that two companies do not prove the whole thesis, but together they show that strong growth and AI adoption can coexist at scale. And are the realizations giving us any early evidence on that? I think they are useful initial evidence.
Speaker: AGT received 134 million pounds of gross realization proceeds in h one um That included the full exit of Intelerat at more than a 60% uplift to with its previous carrying value, and Geomatic at a small uplift despite the transaction being signed during the public software sell-off.
Speaker: and then alongside the partial realization of SEPTER and for recapitalizations. After the half year end, AG agreed the full sale of Quantios to Vista equity partners with AGT receiving 13 million, so one three million pounds at a 31% uplift to carrying value.
Speaker: I think that continued transactions at or above AGT's carrying value during weak listed software markets are useful evidence when assessing those valuations. There is also a specific AI angle as AG has highlighted that the G-Treasury, Intelerat and Quantios are examples where AI product development featured in the value creation story.
Speaker: G-Treasury, sold in late 2025, achieved a more than 95% uplift to carrying value. My understanding is that ai product worldmaps were important diligence items for for the strategic buyers.
Speaker: um That supports our view that private buyers are differentiating between software companies according to their ability to use AI. And what did HGT do on the investment side during the half? AGT invested £146 million pounds in the first half of the year.
Speaker: The largest transaction was OneStream, a US enterprise finance software business, where AGT's total investment reached £91 million pounds through the Saturn IV fund and a fee-free co-investment.
Speaker: AGT also converted around £39 million pounds of its existing Sceptile fund exposure into a fee-free co-investment, invested in RightsLine and made a follow-on investment in Teamworks.
Speaker: Now, co-investments are important because they do not carry the management or performance fee charged at the underlying fund level. They represented 11.3% of NAV at the end of June, which is within the 10-15% long-term target.
Speaker: um Since the period end, AGT has also invested around £57 million pounds in Street Group, Nourish and Ancestors of Zone. um All investments announced by AG in 2026 have been founder-led, which I think is relevant as AG believes the strongest AI strategies are more likely to come from leaders who rethink what is possible with that or AI rather than you know simply make incremental product improvements. And how how should investors think about the balance sheet and those large outstanding commitments? So after the post-period refinancing, AGT had pro forma liquid resources of around £309 million, pounds while outstanding commitments were about £2 billion. pounds On the face of it, that is a large gap, but the timing matters.
Speaker: HG expects around £200 million um pounds of commitments not to be called and the remaining roughly £1.8 billion to be drawn gradually over the next four to five years.
Speaker: um Around £1.5 billion of commitments relate to HG's 2025 and 2026 fund vintages, where Genesis 11 and Mercury 5 are not expected to make their first capital calls until 2028.
Speaker: twenty to eight while Saturn IV is expected to begin calling capital from 2027. AGT also retains an op opt-out provision, which, subject to certain conditions, allows it to decline new investments without penalty.
Speaker: So there is no immediate funding wall, although the commitment profile still needs active management. And were there any changes in capital allocation during the half?
Speaker: The board declared an interim dividend of two pence per share, which is unchanged year in year, and continues to describe five pence per share as a reasonable basis for an annual dividend floor.
Speaker: It also spent 19 million pounds on share buybacks in h one ah The board now has a formal buyback framework based on a set of absolute and relative discount triggers, um although it still weighs buybacks against the opportunity to invest capital through 8G.
Speaker: The revolving credit facility was also extended and increased after the period end. um So total cap capacity rose from £375 million pounds to £450 million.
Speaker: The maturity moved from March 2027 to September 2029 and pricing improved to 3% over the Sterling Overnight Index Average, or SONIA, with a 1.15% commitment fee.
Speaker: That gives HGT a larger working capital buffer while its new newer fund commitments are drawn. And am I right in thinking that HG has also been buying HGT shares? Yes. So in June, HG announced that it intends to increase the combined ownership of its partners, employees and balance sheet from roughly 6% at the time of the announcement to more than 15% of the medium term through on-market purchases.
Speaker: The HD balance sheet made its first purchase on the 12th of June and on the 8th of September, HD disclosed that the relevant consort party comprised of the firm's balance sheet and a subset of partners had crossed the 6% voting rights threshold.
Speaker: I think that for shareholders the important point alignment. AG is committing its own capital at a time where the shares trade at a much wider discount than historically.
Speaker: That doesn't remove the investment risks, but it is a meaningful signal of how the manager views the gap between the share price and the portfolio. Beyond HG, I would also note the continued purchases of HGT's shares by Valhalla Ventures, the investment vehicle of cracking founders Marco Herr and Lindy O'Hara, which as of the 16th of September, had a stake of around 14% in Great. And before we close the conversation today, how would you sum up the investment case following the half year results? For me, the healthy results strengthen the co-investment case. I believe AGT is well positioned to benefit from AI disruption rather than simply defend against it.
Speaker: The portfolio combines mission-critical vertical software, proprietary data, deep domain expertise, and high recurring revenues with a scaled AI capability that ah individual mid-market companies would struggle to replicate.
Speaker: The operating evidence remains strong. Revenue and EBITDA continue to grow at double-digit rates, margins are healthy, and Visma and IFS show that strong growth can coexist with meaningful AI adoption.
Speaker: There are still downside risks. AI may reshape software pricing and competition faster than expected. Leverage remains high in absolute terms, valuation multiples can fall again, and HGT has sizable commitments that rely on continued realizations and access to its credit facility.
Speaker: But leverage is supported by recurring revenues, earnings growth and cash generation, the debt maturity profiles will spread, and recent exit exits provide evidence that private buyers still value selected assets above HGT's current values.
Speaker: On balance, I think the setup is skewed to the upside. um Public software markets have begun to recover and differentiate between AI beneficiaries and companies at greater risk of disruption, while AGT's discount remains above 20%.
Speaker: If the portfolio keeps compounding earnings and AI adoption converts into measurable revenue, margins, and exit value, um there is scope for both NAV growth and discount narrowing.
Speaker: The main risks to that view are a more fundamental deterioration in vertical software economics or a prolonged weak exit environment that constrains liquidity. Milos, thank you very much for a thorough update on HG2. My pleasure, Liam.
Speaker: You've been listening to Uncovering Trusts, a podcast by Edison Group. For more information on HG2 and other investment companies we cover, please visit www.edisongroup.com.
