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41. Uncovering Trusts – HgT: A deep dive into selected portfolio holdings and H125 results
112 Plays9 days ago
In this episode, our director of content, investment trusts, Milosz Papst provides a detailed overview of four portfolio holdings of HgT. He starts with IFS, a provider of cloud enterprise software and industrial AI applications across multiple sectors including enterprise resource planning, enterprise asset management, field service management and enterprise service management for asset-heavy industries, such as aerospace and defence, energy utilities and resources, construction and engineering, manufacturing and telecoms. He then covers P&I, a provider of an integrated HR cloud platform to small and medium-sized enterprises, primarily in Germany. He also delves into Ideagen, a provider of compliance software to organisations operating in highly regulated industries, such as life sciences, healthcare, banking and finance,and insurance. Milosz also covers a more recent investment made by HgT in 2024 in AuditBoard, a modern, cloud-native connected risk platform changing the way enterprises automate, collaborate and report in real time on risk, audit and compliance workflows. He concludes by discussing the key highlights of HgT’s recently published H125 results.
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Transcript
00:00:00
Speaker
Yeah.
Introduction and Guest Welcome
00:00:05
Speaker
Welcome to Uncovering Trusts, a podcast by the Edison Group. I'm your host, Will Manuel, and today I'm joined by Milos Papps, Director of Investment Company Content at Edison, who will talk about HGT.
00:00:18
Speaker
Milos, thanks for joining us today. Hi, Will. Glad to be back.
What is HGT?
00:00:22
Speaker
Good. So um while Edison has been covering HGT extensively for years, maybe you can start with a brief introduction for those listeners who are less familiar with the trust.
00:00:33
Speaker
Yes, of course. um The first thing our listeners should know is that AGT is a private equity investment company which invests in leading profitable, unquoted European mid-market businesses with international footprints, offering mission-critical, low-spend software solutions to small and medium-sized enterprises.
00:00:53
Speaker
It is managed by HG, Europe's leading private equity technology investor, and provides public market investors with exposure to HG's portfolio of over 50 such holdings, representing around $180 billion dollars in aggregate enterprise value.
00:01:09
Speaker
but Therefore, HGT provides high-quality exposure to the corporate digitalization theme, um supported by the structural demographic trend of a declining working-age population, which drives up labor costs in developed countries and, in turn, stimulates software
HGT Portfolio Focus
00:01:24
Speaker
adoption.
00:01:24
Speaker
um Importantly, the Trust's portfolio offers a combination of a high share of recurring revenues based on software-as-a-service subscription models and high customer retention. um AG's sweet spot lies in defensive tech growth companies operating in one of eight core end markets.
00:01:40
Speaker
Tax and accounting, ERP and payroll, legal and compliance, automation and engineering, insurance, SME tech services, fintech and healthcare IT. AGT has historically delivered revenue and EBITDA growth of around 20 to 30% per year at a margin above 25% across its top 20 holdings.
00:02:02
Speaker
Therefore, it fulfills the so-called rule of 40, which is, well, a rule of a thumb, but based on empirical evidence, saying that software stocks with combined revenue growth and EBITDA margins of 40% or more typically generate higher valuations.
00:02:15
Speaker
Okay, thank you. That's that's a very good high-level summary. um So during our discussion before the recording this episode, you suggested that we delve deeper to give our listeners a good flavour of how an HGT portfolio company looks like.
Key Portfolio Holdings: Visma and IFS
00:02:29
Speaker
ah So HGT's largest holding at the end of June was Visma. But given you've covered it in more detail in one of your research notes earlier this year and Invisima should enjoy good coverage ahead of its anticipated IPO, maybe you can talk about other major portfolio companies at HGT.
00:02:46
Speaker
Yes, sure. um I would start with IFS, AGT's second largest holding, which made up close to 10% of the Trust's Enjun portfolio, and which is a provider of cloud enterprise software and industrial AI applications across multiple sectors, including yeah ERP, enterprise asset management, field service management, and enterprise service management for asset-heavy industries, such as aerospace and defense, energy utilities and resources, ah construction and engineering, um manufacturing, and telecoms.
00:03:16
Speaker
It generated annual recurring revenue of more than 1 billion euros in 2024, up by a strong 32% year-over-year. AGT indicated in its interim 2025 report that IFS continues to increase revenues through its focus on transitioning from perpetual to multi-year term licenses with double-digit organic growth.
00:03:35
Speaker
The company serves more than 5,500 customers, with over added alone. Okay, thank you. um And you've mentioned industrial AI applications, which sounds interesting.
00:03:48
Speaker
ah Can you say something more about this? Yes, of course. um The company's IFS AI platform, which is part of IFS Cloud, ah combines a data foundation layer and the governance and orchestration layer with business process automation and optimization, and then AI powered user experience, which includes a co-pilot feature.
00:04:08
Speaker
IFS AI is used by the company's clients to manage critical assets worth $2.4 trillion. What I found particularly interesting is a comment made by Satyan Dela, chairman and CEO of Microsoft, including the 2024 annual report of IFS.
00:04:23
Speaker
He said, quote, IFS AI is, I think, fundamentally going to be transformative in giving any industrial setting that next leg up. not just in the core manufacturing processes, but in all the knowledge work that happens alongside manufacturing." and of course um Microsoft is IFS's partner and IFS Cloud is deployed on Microsoft Azure and sold via the Azure Microsoft Commercial Marketplace.
00:04:49
Speaker
Okay, nice. Thanks for this useful background.
P&I's Role and Growth in the Portfolio
00:04:52
Speaker
um And how long has HGT been invested in is Yeah, so AGT first invested in IFS and WorkWave, a sister company providing vertical software within field service management, primarily in North America, in July 2022, when it became a significant minority shareholder alongside EQT as a majority shareholder and TA Associates as a significant minority shareholder.
00:05:19
Speaker
in a transaction which valued both businesses at a combined $10 billion. dollars um HG recently doubled down ons on its investment with HG funds making a follow-on investment in the first half of 2025, with HGT alone deploying £120 million. pounds This brought the total equity stake across all HG funds in IFS to more than 45% at the end of June um compared to 29% at the end of 2024. IFS was the top contributor to value accretion across AGT's portfolio in H1 with a 41 million pound increase in value.
00:05:52
Speaker
equivalent to around 26% of the N2024 current value and also also among the top contributors in 2024. Okay, thanks. That's helpful. um I believe you also wanted to cover personal and informatic or P&I today?
00:06:07
Speaker
today yes um P&I is a business with a long heritage dating back to 1968, which was SageGT's fourth largest holding as of the end of June, making up around 6.6% of portfolio value.
00:06:21
Speaker
It is a provider of an integrated HR cloud platform to SMEs, primarily in Germany, but also other European countries. Its current base covers more than 15,000 customers. So this quite fragmented with a particular exposure to the more resilient public sector and upper mid-market segments.
00:06:40
Speaker
ServiceScope covers payroll, core HR, human capital management, time and attendance, as well as analytics. Interestingly, it's cloud platforms hosted by P&I's own HR data center with all the hardware, technical hosting services, data security measures, etc.
00:06:58
Speaker
um The company has also launched an HR as a service solution with full responsibility of the system's technical administration, processing of all payroll related transactions and um payroll accounting.
00:07:11
Speaker
um In the last financial year to end of March 2025, P&I delivered revenue of more than 300 million euros, of which 85% is recurring, with organic growth of nearly 23% during the year. year Now, HGG highlighted in HGT's interim report that P&I continues to develop positively.
00:07:30
Speaker
um driven by its ongoing transition to software service model, which is a common feature of AGT's investments, and an acceleration of new customer wins on the back of further product innovations.
00:07:41
Speaker
um HG highlighted that the shift to a term license model drives higher cash flow visibility for the business. As a result, P&I was AGT's second largest value driver in H1, with an increase in fair value of close to 35 million pounds, or 33%, compared to the end-2024 carrying value.
00:08:00
Speaker
um AG's value ah creation agenda for P&I includes the stimulation of value-based upsell of existing SaaS customer base towards ah new AI-driven product suite, extending well beyond payroll.
00:08:14
Speaker
um It also wants P&I to invest into the sales organization to drive new logo wins, sees a further margin uplift potential from operational leverage as the business scales, and also believes that there are good M&A opportunities.
00:08:27
Speaker
Right, thank you. And ums what's HGT's history with the company? HGT first invested in P&I back in 2013, so a while ago, alongside HG Capital 7 Fund in a take private deal.
00:08:40
Speaker
um The HG Fund then sold most of its holding to Permira, generating a strong 37% IRR over a three-year investment period, um but retained the minority stakes.
00:08:51
Speaker
retained a minority stake. Subsequently, it again increased its stake in 2020, becoming a majority investor, and then bought the remaining minority stake from Permira in H1 this year, bringing its stake to around 88% at the end of June.
00:09:06
Speaker
As part of the H1 transaction, AGT invested £115 million, pounds which was coupled with around £50 million pound proceeds from the recapitalization of the business, so resulting in a net investment of roughly £65 million.
00:09:19
Speaker
Right, thank you. So I believe regulatory and compliance software is and also an important theme these days. um And I think HDT highlighted in its interim app report that the market is worth over $30 billion dollars globally.
00:09:33
Speaker
Is this theme represented in HDT's portfolio?
Emerging Investments: IdeaGen and AuditBoard
00:09:36
Speaker
Yes, it is. um One of AGT's top 10 holdings at the end of June is IdeaGen, a provider of compliance software to organizations operating in highly regulated industries such as life sciences, healthcare, banking and finance and insurance.
00:09:51
Speaker
The company has a global footprint across the UK, US, Middle East, Australia and Southeast Asia with more than 13,000 customers. AGT invested in IdeaGen in July 2022 as part of a take private transaction, so similarly to P&I.
00:10:07
Speaker
carried out via the Genesis 9 and 10 mid-cap funds. A few months later, IdeaGen was merged with ProcessMap, a provider of environmental health and safety software. IG highlighted back then that both companies have complementary product suites and a diversified regional cover.
00:10:24
Speaker
um According to HG, IdeaGen has a good track record of delivering strong organic revenue growth with continued margin expansion while delivering accretive and strategic acquisitions. so And so trading last year was robust as well.
00:10:36
Speaker
Okay, thanks for that detail rundown. um So I noticed that the three companies we've covered so far, um those investments were made by HGT a few years ago.
00:10:48
Speaker
ah Can you cover or give us an example of a more recent investment as well? Yes, with pleasure. i think that Audit Board is a good example as AGT invested more than 100 million pounds in the business in July 2024. It is a modern cloud native connected risk platform, um changing the way enterprises automate, collaborate and report in real time on risk, audit and compliance workflows.
00:11:12
Speaker
AG highlights that the business sets itself apart with a customer-centric approach and a combination of innovative technology and domain expertise. It serves a fragmented client base of more than 2,500 enterprises, including more than half of the Fortune 500 companies.
00:11:30
Speaker
95% of its revenues are recurring with annual subscriptions and average contract lengths of three to five years. AGC's significant M&A opportunity for the company given the high fragmentation across vendors and customers.
00:11:45
Speaker
Okay, and and what's HG's plan with respect to its investment in Audit Board beyond M&A? Yes, so HG has outlined several value creation levels and projects for Audit Board.
00:11:56
Speaker
um Firstly, product innovation and cross-sell of newer products. Secondly, margin improvement via operational initiatives across hosting, R&D, sales and marketing. Thirdly, value-based pricing packaging improvements. And finally, international expansion.
00:12:11
Speaker
In the H1 report, HG highlighted that Audit Board has continued to perform well, sustaining double-digital organic growth while achieving meaningful margin expansion and scaling operations globally, and that the company finished H1 ahead of budget on top-line growth and EBITDA.
00:12:27
Speaker
um It also underlined the recent launch across the Dach region. Right.
How is HGT Adapting to Market Changes?
00:12:32
Speaker
Great. um So I think these case studies have provided our listeners with a very good understanding of what type of companies HGT invests in.
00:12:40
Speaker
The trust recently announced its final results for the first half of 2025. Can you briefly elaborate on this as well? Yes, of course. um AGT reported and op four percent an 0.4% NAV decline in total return times in H1, which was negatively affected by public market volatility we've all seen in the first half of the year.
00:13:01
Speaker
um However, this represents a sequential rebound in Q2 following the 2% NAV fall in Q1. um Last 12 month revenue in EBITDA growth in June across AGT's portfolio was a strong 19% and 18% respectively, contributing a positive 8% points to its portfolio valuation in each one.
00:13:19
Speaker
um Now, AGT's head of research highlighted that customers are focusing largely on mission-critical software and established vendors at present, which suggests tight tight control of IT budget and a tougher macroeconomic backdrop.
00:13:32
Speaker
And he said that this is consistent with their own experience with the AG portfolio. um He also highlighted that winning new customers is challenging at present, though um ah would note that most of the revenue growth across AGT's portfolio companies normally comes from cross and upsell to existing clients.
00:13:49
Speaker
um Importantly, HG starts to see a stabilization in the broader software market, which suggests an improving trading momentum into 2026. HG also highlighted that its continued investments in AI capabilities and the expansion of its serial chair program positions HG well to capture the significant opportunities ahead, ah particularly as agentic AI moves from potential to productivity in products that are offered to customers across HG's portfolio.
00:14:17
Speaker
In terms of transactions, AGT's gross realization proceeds reached £165 million pounds in each one, so around 7% of opening NAV, which according to AG compares favorably with PEACE in a challenging environment. so ah Investments, including reinvestments, stood at £306 million, pounds or opening Okay, thank
Closing Remarks and Call to Action
00:14:39
Speaker
you, Milos. That was a very interesting rundown on this specialist tech investor.
00:14:43
Speaker
ah 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.com.