Leading private equity investment trust takes advantage of high valuations to sell some of its positions and leave it 26% in cash.
HgCapital (HGT) looks to continue its strong net asset value (NAV) growth into the second half of the year, according to analysts, with the private equity investment trust having already agreed several exits from its holdings.
Half-year results from the £635 million company reported a total return from the portfolio of 12.1% in the first six months of the year against a 5.5% increase in the FTSE All-Share index. The share price has risen 10% since the end of 2016.
The growth in the fund, whose shares trade 8.7% below NAV – significantly lower than its peer group average discount of 22% – has been boosted by a ‘very competitive’ private equity market with ‘high multiples in the US and Europe’, said Liberum analyst Conor Finn.
‘This trend benefits sellers and HgCapital trust’s manager will seek opportunities to return further value from the portfolio over the next 12 months at uplifts to book value,’ he said.
The most recent realisation of Sequel Business Solutions, which provides insurance software, was sold at an uplift of 161%, returning £20 million to the investment trust.
Finn said other realisations in the first half of the year had generated increases in valuations from 28% to 101%, which he estimated contributed 129p to its NAV per share. Since the half-year end, five exits were agreed, completed, or due to complete in the second half of the year with UK accountancy software business IRIS thought to be included. Its latest valuation was £75 million.
In the first half of the year the fund received £134 million of cash from disposals and invested £40 million. House broker Numis Securities said the cash pile could be a problem as it acccounted for 26% of assets and would ‘dilute the impact of future portfolio growth for investors’.
He said the high level of cash reflected the manager’s ‘view of pricing in the current market and the emphasis on realisations’.
‘Historically, HgCapital has timed the cycle well, being a net seller from 2006-2008, and a net buyer of assets from 2009-2011,’ he said.
The growth in NAV in the first half may have impressed some analysts but it was 3.5% behind what was expected by Panmure Gordon analyst Charles Murphy.
‘We weren’t massively adrift and believe that HgCapital remains on track regarding our full-year forecast,’ he said.
‘We retain our view that full-year 2017 should deliver strong returns on the back of exit activity and earnings growth,’ he said.
‘In 2018/19, we expect that the fund’s NAV total return will soften considerably as J-curve effects together with high cash balances take their toll.’
The J-curve effect occurs in private equity when funds experience negative returns for the first few years as the investment portfolio has yet to mature.