HGCapital Trust PLC · LSE:HGT
HGCapital Trust — Investor Presentation (2011)
34 slides from HGCapital Trust's investor presentation, 2011
Slide 1: How "thematic investing" Generates Outperformance in a Low Growth Environment
HgCapital Trust plc How “thematic investing” Generates Outperformance in a Low Growth Environment Ian Armitage & Nic Humphries
Slide 2: Contents
HgCapital Contents Trust plc HgCapital Trust plc 3 HgCapital at a glance 5 How to Outperform 7 Our Vision 11 Our Strategy and Tactics 12 Case Study: Visma 16 HgCapital Trust plc 24 Appendices 27 © Copyright 2011 HgCapital 2
Slide 3: Long-term Growth
HgCapital Long‐term Growth Trust plc The Trust continues to see strong performance 10 Year Record 10 year annual compound growth of 14% p.a. vs FTSE All-Share +3.7% p.a., significant outperformance of peer group Recent Performance Share price total return +23% in 2010. LTM share price total retu
Slide 4: Relationship with the Manager
HgCapital Relationship with the Manager Trust plc It carries our name HgCapital Trust plc currently represents 10% of the Manager’s FUM (£3.4bn) and 15% of the current buyout fund (Hg6), investing alongside all other clients The Trust has exposure to everything HgCapital invests in under the sam
Slide 5: HgCapital At A Glance (1)
Overview HgCapital At A Glance (1) £3.4 billion client assets managed. Current funds are: – Mid-market, control buyouts in Northern Europe in 4 sectors (business services, healthcare, industrials, TMT) - HgCapital 6: £1.9 billion (closed in 2009/10) – Mid-market, control renewable energy infrastru
Slide 6: HgCapital At A Glance (2)
Overview HgCapital At A Glance (2) STRATEGY Mid-Market £100 million - £500 million EV buyouts/buy-ins Mid-Market Sole / lead / control investors Seek multiple value levers Conservative capital structures Pan-Regional Primary coverage of northern Europe Cultural affinity with management t
Slide 7: 4 Sources of Value-Creation
How to 4 Sources of Value‐Creation Outperform Financial leverage (debt) Financing skills Multiple expansion (exit v entry) M&A skills “operating experience” – cost down Operational improvement - OR EBITDA margin “operating experience” – growth “sector experience” – strategy Operational improvement -
Slide 8: How Private Equity Value Creation Has Evolved
Appendices How Private Equity Value Creation Has Evolved 1980 ‐ 2010 The BCG study found that the way in which the private equity industry creates value has evolved over time, with operational improvements increasing in importance and leverage decreasing in importance 32% 25% % source of value 51% 3
Slide 9: PE Industry Return Attribution 2001-2007
How to PE Industry Return Attribution 2001‐2007 Outperform A more recent study* agreed that 50%+ of value created was attributable to operational improvements BUT Most of this, 40% of the total, was from EBITDA MARGIN or cashflow improvement; Only 10% of the total was from REVENUE GROWTH CoC x 0.52x
Slide 10: HgCapital strategy has generated consistent returns from replicable sources
How to HgCapital strategy has generated consistent returns from Outperform replicable sources Almost 100% of HgCapital’s value-creation has been from operational improvements – picking strong companies and growing them (not leverage or deal-doing), OF WHICH 65% CAME FROM REVENUE GROWTH 3.0x MULTIPLE
Slide 11: Sources of Value-Creation: HgCapital View of the Future
Our Vision 4 Sources of Value‐Creation: HgCapital View of the Future Financial leverage (debt) => Financing skills: 1990’s Niche firms e.g. small buy- outs, local experts, distressed debt etc Multiple expansion => M&A skills: 2000’s (exit v entry) Turnaround firms or Operational improvement => “oper
Slide 12: HgCapital Strategy: sustainable growth from buying and building great companies
Our Strategy HgCapital Strategy: sustainable growth from buying and building and Tactics great companies ⇒ “thematic investing” Pick sustainable growth ⇒ requires deep sector sub-sectors expertise to understand 10+ year growth trends ⇒ “4P’s” toolkit Invest in the highest quality, sustainable ⇒ HgCa
Slide 13: Top-down macro themes that will support many investments
Top‐down macro “themes” that will support many investments Our Strategy over many years plus proprietary “4Ps” toolkit to evaluate and Tactics sustainable growth companies Processes for systematically innovating new macro-themes which will support multiple “Thematic” origination investments over s
Slide 14: What skills do you need to do thematic sector investing?
Our Strategy What skills do you need to do “thematic sector investing”? and Tactics HgCapital has 5 dedicated sector teams Deep sector Investment understanding experience Each is headed by a Partner with LONG TERM “thematic EXPERIENCE OF INVESTING sector IN THAT SECTOR investor” Large teams: 6
Slide 15: Examples of HgCapital themes & sustainable growth rates
Our Strategy Examples of HgCapital “themes” & sustainable growth rates and Tactics SECTOR SUB-SECTOR EXAMPLES APPROX. 2008 – 2010 REVENUE CAGR (%) SME outsourcing 7 – 10% BPO Business Services Fiduciary compliance 15% Healthcare Acute healthcare services 7 – 10% Industrial Services Specialist B2B di
Slide 16: Thematic origination
“Thematic origination”: Researched regulatory SME software since 2002 “Thematic” Unusual, conservative thinking in the technology sector: origination – We do not seek any higher returns in TMT buyouts than in any other sector, because we don’t take risks that are any higher than in any other secto
Slide 17: Multiple investment examples before we approached Visma
Multiple investment examples before we directly approached Visma => discussions with management were “trade player to trade player” Acquired 2004 £102m #1 for UK accounting practices. 4 bolt-on acquisitions Sold for £500m with CSG in 2007. Exit multiple: 14x EBITDA 65% IRR, 3.6x CoC (gross)
Slide 18: Sector expertise identified the sustainable growth theme and quality of business
Our sector expertise identified the “sustainable growth theme” and the quality of the business (“4Ps”) Value 1 & 2. “Protected & Predictable revenue growth” Creation – >200,000 SME customers, business critical software Thesis – >70% revenues contractual annual subscriptions, <5% churn – Revenue grow
Slide 19: Portfolio Team helped management improve operations: Visma BPO division
Our Portfolio Team then had the time and skills to help management improve the operations and position of the business: example Visma BPO division EXAMPLE: A classic bookkeeping business, operating at single digit margins “What we found in the Built up over the course of 4 years through 40 acqui
Slide 20: What Did We Change in the Business?
What Did We Change in the Business? Pricing Standardising Structure processes The SMART + concept Reporting Automating © Copyright 2011 HgCapital 20
Slide 21: Financial Impact of Transformation Process
Financial Impact of Transformation Process 5% revenue CAGR despite 2008-9 recession 6.5% EBITDA expansion from efficiency not cost cutting REVENUE AND EBITDA IN VISMA BPO SME (NOKm) 530 490 18.1% 11.6% 96 57 2008 LTM (Feb-11) Revenue EBITDA Margin (%) © Copyright 2011 HgCapital 21
Slide 22: What next? Realised £240m but still £140m invested
What next? We have realised £240m (2.4x CoC / 37% IRR) but still have £140m (1.4x CoC) invested… IT SERVICES TRANSACTION PROCESSOR Revenues (NOKm) Value Revenues (NOKm) Value 5,700 0.7x 5.7x 1,000 700 1,000 © Copyright 2011 HgCapital 22
Slide 23: 2006 – 2011B Revenue and EBITDA Evolution
2006 – 2011B Revenue and EBITDA Evolution Proof of ”building high quality sustainable growth businesses” 14% revenue CAGR & 22% EBITDA CAGR even through 2008-9 recession 4,973 Revenue 14% CAGR EBITDA 22% CAGR 4,175 NOK(m) 3,381 3,046 2,723 2,309 20% 19% 21% 18% 18% 14% 1,025 811 555 684 490 324 2006
Slide 24: Conclusion
HgCapital Conclusion Trust plc Rewarding the patient investor Our resources and investment strategy lead us to believe that we can continue to deliver superior returns to our clients Short term NAV growth will be driven by potential realisation activity from our 2006 vintage fund and continued s
Slide 25: HgCapital Trust has rewarded the patient investor
HgCapital Trust has rewarded the patient investor – HgCapital outperforming the FTSE All‐Share Index by 2.8x and listed PE Trust peers by 3.1x over the last 10 years +11.0% p.a. share price appreciation for HgCT vs. -2.1% p.a. for LPE Peers, 0.3% p.a. for the FTSE All-Share Index 10 year total retur
Slide 26: Outperforming its listed PE peers
HgCapital HgCapital Trust – Outperforming its listed PE peers Trust HgCapital Trust outperformed key competitors by an average of 3.1x over the last 10 years Best performing peer Electra was outperformed by 1.6x and worst performing 3i by >6.8x 300% 284% HgCapital Trust Pantheon Electra 250% SVG Gra
Slide 27: Appendices Contents
Appendices Contents Case Study: Visma – 4Ps toolkit 28 HgCapital Trust plc: Financial Highlights 29 HgCapital Trust plc: NAV Total Return 30 HgCapital Trust plc: Portfolio as at 30 April 2011 31 Disclaimers 33 © Copyright 2011 HgCapital 27
Slide 28: 4Ps toolkit to evaluate business model
Appendices “4Ps toolkit”: analysis shows that the business model offers protected and predictable growth, ideal for PE returns 1. “Protected” “4Ps” toolkit to evaluate – Business critical applications (tax, payroll, accounting), so secure in an economic downturn because need to have not nice to have
Slide 29: Financial Highlights – Share Price
Appendices Financial Highlights – Share Price % CHANGE OVER YEAR SHARE PRICE AT 30 APRIL 2011 AT 31 DEC 2010* AT 31 DEC 2009 TO 31 DEC 2010 Share price (ordinary shares at mid-market) 1,130.0p 1,006.0p 844.0p 19.2% (Premium)/Discount (%) over NAV (basic) (0.3%) 10.1% 9.9% n/a Share price (subscripti
Slide 30: Total Return
Appendices Total Return* Consistent and significant outperformance of the Index 1 YEAR TO 3 YEARS TO 5 YEARS TO 7 YEARS TO 10 YEARS TO 31 DEC 2010 31 DEC 2010 31 DEC 2010 31 DEC 2010 31 DEC 2010 Net asset value (basic) 22.6% 8.5% 15.0% 18.6% 12.8% Net asset value (diluted) 19.5% 7.6% 14.5% 18.2% 12.
Slide 31: Portfolio as at 30 April 2011
Appendices Portfolio as at 30 April 2011 The top 10 buy‐out investments represent 60% of the portfolio value Total Year of Residual valuation* Portfolio Cumulative Investment Investment Sector Location Cost £’000 £’000 value % Value % 1 TeamSystem 2010 TMT Italy 24,432 25,136 9.7% 9.7% 2 Visma 2006
Slide 32: Portfolio as at 30 April 2011
Appendices Portfolio as at 30 April 2011 The top 20 buy‐out investments represent 92% of the portfolio value Total Year of Residual valuation* Portfolio Cumulative Investment Investment Sector Location Cost £’000 £’000 value % Value % 11 Manx 2010 TMT UK 11,033 11,033 4.11% 64.33% 12 SimonsVoss 2010
Slide 33: Disclaimer
HgCapital Disclaimer This document accompanies the Annual Report and Accounts for the year ended 31 December 2010 and contains a summary of the information set out in that document. Reference should be made to the full Report and Accounts rather than relying on this summary. It does not constitute a
Slide 34: Disclaimer
HgCapital Disclaimer Forward-looking statements are not guarantees of future performance. A number of important factors could cause actual results or outcomes to differ materially from those expressed, projected or implied in any forward-looking statements. No one undertakes publicly to update or re