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HgCapital shines as trust bucks private equity gloom

Private equity investment trusts have long lingered in the doldrums but strong results from HgCapital paint a brighter picture.

HgCapital shines as trust bucks private equity gloom

Shares in HgCapital have surged after the private equity investment trust bucked the gloom that has surrounded the sector by posting returns well ahead of expectations.

HgCapital (HGT ) jumped 7.9% to £10.79 after the trust revealed a 14.1% jump in net asset value over 2015, to £14.20, compared to £12.78 at the end of last year. The NAV rose a further 2.5% to £14.55 by the end of last month, largely due to foreign currency movements, taking it around £1 higher than estimates from analysts at Jefferies.

Like most private equity investment trusts, shares in HgCapital have traded at a heavy discountsto NAV. Since the financial crisis, double-digit discounts have become the norm, and shares in trusts across the sector have come under renewed pressure in the market turmoil since the turn of the year.

Matthew Hose, analyst at Jefferies, said the sell-off in private equity appeared 'indiscriminate', while Charles Cade, analyst at Numis, the trust's house broker, argued HgCapital's discount appeared 'excessive'.

Despite the jump in the shares, the discount to the updated NAV has actually widened, to 25.8%, compared to the 21.6% discount the shares were yesterday trading at relative to the prior NAV, of £12.75, updated in November last year.

'We believe that this discount is excessive given the quality of HGT's portfolio and the strength of its long-term track record,' said Cade.

HgCapital's performance in 2015 was driven by £28.8 million of gains from companies sold, including software provider Team System and part of its stake in commercial laundry business JLA.

Valuations of some of the companies still held by the trust also rose, by £82.3 million, reflecting increased valuations for comparable quoted companies, particularly those in the software sector.

However, this gain was hit by currency movements, continuing a longstanding headwind for the trust, which has been hit by the weakness of the euro and Scandinavian currencies against the pound.

However, the pound's slump since the turn of the year as fears over a UK exit from the European Union have weighed has seen that trend reverse.

'We believe that this represents a significant opportunity for investors,' said Cade. 'The average valuation multiple for the top 20- buyouts of 14.3 times earnings is high relative to other listed private equity funds, but this reflects the focus on quality growth companies that provide a business-critical product of service, have highly predictable earnings from contracted or recurring revenues and a diversified loyal customer base,' he said.

2 comments so far. Why not have your say?

Brent Davies

Mar 08, 2016 at 17:23

Given market uncertainties at this discount level this offers a good long term investment.

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Mar 11, 2016 at 12:38

I'm not convinced - I got rid of my holding back in 2014 as it had gone nowhere much in 3 years. The current price is still well below its previous peak. My Electra holding - which I retained - did much better over the same period and is now over 100% up.

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The hedge fund that's beaten Woodford twice

by Daniel Grote on Apr 25, 2018 at 16:00

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