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16. Uncovering Trusts – HgT’s H124 results discussion
65 Plays1 month ago
In this episode, our director of content, investment trusts Milosz Papst discusses the interim results of HgT, which invests in leading, profitable, unquoted European mid-market businesses with an international footprint, offering mission-critical, low-spend software solutions to SMEs. He talks about the trust’s solid NAV total return performance (driven by earnings growth across its portfolio) and solid realisations which were carried out at an uplift to previous carrying value. He highlights HgT’s recent new investments, and also elaborates on the recent portfolio debt refinancing and the associated interest expense savings and maturity extensions. Finally, he comments on HgT’s holding-level liquidity and commitment coverage ratio.
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About ‘Uncovering Trusts’
'Uncovering Trusts': is a podcast run by Edison analysts released every two weeks. Subscribe to hear analyst interviews on how investment trusts maximise returns while managing risks for investors.
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Edison covers 50+ investment trusts, read about them here: https://www.edisongroup.com/equities/investment-companies/
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Transcript
Introduction to Uncovering Trusts Podcast
00:00:06
Speaker
Welcome to Uncovering Trusts, a podcast by the Edison Group, a content-led IR business integrating analyst content, digital targeting, and investor engagement. Each episode will uncover the distinct features and latest developments of a selected listed investment company. So tune in to find interesting investment ideas and stay on top of what's happening in the investment company sector.
Discussion on HGT's European Software Investments
00:00:28
Speaker
I'm your host, Will Manuel, and today I'm joined by Milos Paps, Director of Investment Trust Content at the Edison Group, for a special episode to discuss the interim results of HGT, which invests in leading, profitable, unquoted European mid-market businesses with an international footprint, offering mission-critical low-spend software solutions to SMEs. Milos, thanks for joining us today.
00:00:51
Speaker
Thanks, glad to be back for the special episode. And can you start by discussing some of the key highlights from HGT's recent results?
HGT's NAV Performance Overview
00:01:00
Speaker
Sure. HGT continues to deliver strong NAV total returns with 6.4% posted in the first half of 2024, which brings its return over the last 12 months to end June 24 to 13%. This is well ahead of other UK listed private equity investment companies,
00:01:19
Speaker
and allowed AGT to maintain its impressive long-term track record of delivering average NAV total returns in excess of 18% per year over the last 10 years.
Realization Proceeds and Expectations
00:01:29
Speaker
um Importantly, despite the still quite modest exit activity across global private equity markets, which leaves many limited partners in PE funds starved of distributions,
00:01:39
Speaker
and AGT received healthy gross realisation proceeds from exits and refinancing in the first half of 2024 of close to £350 million, pounds representing roughly 14% of AGT's opening and AV. A further 75 million of realisations is already signed and expected to close in the second half of this year.
Earnings Growth and Its Role in HGT's Success
00:01:58
Speaker
okay interesting so um My question is, to what extent has HGT's MAV total return performance been driven by earnings growth across its portfolio compared to higher peer multiples used to value HGT's holdings?
00:02:12
Speaker
Yeah, that's a very important question. um The primary driver of AGT's performance was earnings growth across this portfolio, ah which has also been the major contributor to AGT's long-term performance. um The company highlighted that the revenue and EBITDA growth across its top 20 holdings, which make up close to 80% of its portfolio over the last 12 months, was 19% and 26%, respectively. um I believe it is a strong level and consistent with what AGT's portfolio has delivered in the past.
00:02:41
Speaker
8G's head of research highlighted that the average organic EBITDA growth across 8GT's portfolio holdings usually stands at around 10 to 15% with the rest of the reported growth coming from Baltimore acquisitions, which by the way have also been supporting returns because they were carried out at valuation multiples below the multiple at which the acquirer was valued. I would also mention the healthy EBITDA margin of 34% over the last 12 months, which is again in line with what 8GT's portfolio delivered historically.
00:03:11
Speaker
The company also highlighted that customer churn across its portfolio remains low and stable, supporting organic growth from across an upsell. I would say that the consistent performance over the long term from a portfolio of relatively defensive but fast-growing software-as-a-service businesses offering mission-critical, low-spent products is the main attraction of the trust. I discuss this in more detail in the latest review note published in August.
Impact of Valuation Multiples on HGT
00:03:39
Speaker
Meanwhile, the change in multiples used to value the portfolio had a marginal negative impact on AGT's performance in age 124. Historically, the long-term net effect from the positive and negative changes in multiples in the respective years has largely been neutral. In fact, AGT's investment manager normally assumes a multiples contraction in its investment case, although this has not materialized a meaningful extent in the past.
00:04:02
Speaker
I would also note that the valuation multiples used to value AGT's portfolio holdings are normally derived from a blend of public and private M and&A multiples and they are less volatile than valuations in public markets. um Therefore, if you look at the average last 12-month EVEDA multiple across AGT's top 20 holdings since the beginning of 2020 and compare it with public software and services businesses, um which is what AGT has shown in their latest investment presentation,
00:04:30
Speaker
You will see that in public multiples expanded more significantly in 2020 and 2021 than across AGT's portfolio and then derated more strongly in 2022. Okay, thank you. So that that's reassuring that most of AGT's performance has come from earnings growth. ah But how do the valuations implied by AGT's recently completed realizations compared with the carrying values of which they're held in AGT's books before the transaction?
Realization Uplifts and Performance Indicators
00:05:00
Speaker
This is obviously an important consideration. What really matters in the end is if AGT is able to actually realize investments at or above the portfolio marks. and The trust has a commendable long-term track record with its respect with an average uplift of 35% over the last 10 years, ah which I discussed in more detail um in our previous podcast episode on AGT back in March this year.
00:05:22
Speaker
ah The trust-full and partial they trustful and partial realizations during the first half of 2024 were completed at an average 16% uplift the previous carrying value. This ability to consistently deliver solid realisation volumes at or above carrying values may be one of the reasons that HDT trades close to net asset value. Right, okay. So um you mentioned that HDT outperformed other listed PE companies.
00:05:49
Speaker
How about UK listed investment trusts investing in listed tech businesses? Well, um the outperforms of mega cap US tech stocks has been reflected reflected in the NAV total returns of um some of the yeah UK listed tech investment trusts, most notably Polar Capital Technology Trust and Allianz Technology Trust, which over the last 12 months to end June, 2024, visibly outperformed both AGT and several other UK listed investment companies investing primarily in public technology companies.
00:06:20
Speaker
ah Both of these trusts, as well as major tech ETFs, were also the top performers of the 10 years, ah supported by the magnificent seven stocks. That said, AGT was the top performer among UK-listed tech-focused investment companies over the last three years to end June 2024. It also outperformed all peers, except for the above mentioned two, over five and 10 years to end June 2024.
00:06:43
Speaker
In my opinion, this highlights HDT's role as high-quality technology play, which makes it a promising complement to listed big tech companies. And by the way, the trust also significantly outperformed the MSCI World Small Cap Index and the UK Alche Index.
HGT's Investment Strategy and Execution
00:06:59
Speaker
Okay, great. So now and let's maybe turn to HDT's investment activity. I'd assume the solid realisation proceeds would allow the trust to seize further investment opportunities.
00:07:09
Speaker
Yes, I would start by highlighting that AGT has been quite cautious in terms of platform investments in 2023, but conducted more than 280 bolt-on investments across its portfolio in 2023 and Q1.24. AGT's platform investments year-to-date have increased significantly compared to the first half of 2023. That said, its manager highlighted that it remains sensitive to investment quality and valuation in the recovering market.
00:07:37
Speaker
Its 310 million pounds investments in H124 include three reinvestments in Visma, Iris, and GDW, as well as complete new investments in Kube, active in automated regulatory intelligence and regulatory change management technology, CINC systems, a cloud-based software company serving the community association management sector in the US, and Enduva, an independent corporate insurance broker in Belgium, which met with its competitor Clover.
00:08:07
Speaker
um It is worth noting that its investments in the first half of 2024 include 43 million pounds of coin investments alongside an AG private fund um instead of the usual investment as a limited partner in the fund. These coin investments are free of fees and overall now represent 7% of AGT's portfolio with the medium-term objective to increase further to around 10 to 15%.
00:08:30
Speaker
um After reporting date, AGT made several further new investments, which estimates will represent a value of £183 million pounds post-completion. This includes, for instance, Audit Board, a connected risk platform for audit, risk compliance and ESG management, and Focus Group, a provider of essential business technology to SMEs, including IT, telecom and connectivity services.
00:08:52
Speaker
AGT can redeploy most of its realisation proceeds as it is primarily a capital appreciation vehicle and therefore pays only a modest but regular dividend. Moreover, it often trades close to par and therefore is not tempted to embark on extensive buyback programmes. Okay, thank you. Is there anything of interest to update about the portfolio level debt in the first half of 2024?
AGT's Debt Refinancing and Financial Health
00:09:15
Speaker
Indeed, there is. AGT's portfolio manager has taken advantage of an improving funding environment to refinance a significant part of the portfolio-level debt with estimated $140 million dollars annualized interest rate savings. As a result, there are no debt maturities within the next two years, and over 80% of debt matures beyond three years across AGT's portfolio. Okay, that's good to know. um And how about the holding-level liquidity and indebtedness?
00:09:42
Speaker
AGT had 148 million pounds of cash and cash equivalents at the end of August 24 on a performer basis that is adjusted for all announced transactions, FX movements and the declared dividend. um Moreover, AGT has 310 million pounds of an undrawn credit facility at its disposal, whose maturity was recently extended until March 2027.
AGT's Liquidity and Investment Commitments
00:10:07
Speaker
This credit facility and the cash and equivalents cover 65% of ADT's outstanding investment commitments of £707 million. pounds um I believe this is this is a safe level given that these commitments are normally drawn over two to four years. Okay, so thank you very much, Milos. This has been a very interesting discussion. You've been listening to Uncovering Trusts, a podcast by the Edison Group. If you want to find out more about HGT and other investment companies we cover, please visit www.edisongroup dot.com.