Add growth to your portfolio with unlisted opportunities

Roger Mountford, Chairman, HgCapital

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Large institutional funds targeting long-term returns, such as pension schemes, endowments and sovereign wealth funds, have for decades made an allocation to private equity. But the large minimum stake usually requiring many millions, and the long and illiquid commitment combine to create barriers that close off this opportunity for individuals, family offices and smaller institutions.

Imagine if such an investor were asked “Would you be interested in a vehicle, whose shares are listed and freely traded on the London Stock Exchange, that invests directly into a portfolio of fast-growing unlisted businesses alongside those major institutions, managed by one of the most successful investors in the business? And would it help if you could see exactly what is in the portfolio, and have the comfort of supervision by an independent board?”

The answer is clear. It would be an opportunity worth taking very seriously.

Investment trusts have given investors tax-efficient access to specialist asset classes for more than a hundred years. They benefit from strong governance and a robust regulatory framework. Within their extensive range of offerings there is a sub-set of private equity investment trusts; and within this group of some 22 trusts there is a range of choices by way of investment style, geography and sector. Investors can select the kind of exposure they want, whether to a fund of funds diversified across the whole world of private equity, or a more concentrated portfolio actively managed by a single, specialist firm.

As a part of a diversified portfolio I believe that an allocation to a specialist manager of unlisted businesses can add tangible long-term value. The manager I have fancied most, and been invested with for more than a decade, is HgCapital. As any chemist might spot from its name, the business originated as part of Mercury Asset Management, the hugely successful investment business set up by SG Warburg in 1969; the team became independent more than fifteen years ago and the firm has grown steadily since then. Today, it has more than a hundred investment professionals, covering the whole of northern and central Europe from offices in London and Munich.

The team has established a long and enviable track record. HgCapital, the listed investment trust whose Board I chair, has delivered a total return to shareholders of 14% per annum for the last 20 years. The total return last year was also 14% which, against a return of only 1% in the Index, will have added some much-needed sparkle to an otherwise dull year, in any portfolio that held HgCapital shares.

Over the last ten years, the net asset value has grown, on a total return basis, by over 9% per annum, or 1.4 times the return from the FTSE All Share Index. The Trust came through the financial crash with barely a blip. And for those investors who want income--while the trust is not managed to deliver a particular level of dividend, the average yield over ten years has been 2.9%.

How well placed does the trust look today? The great majority of its assets comprise 29 businesses selected by HgCapital for their potential to grow and create shareholder value. Together, in 2015 they had sales of £2.3 billion and EBITDA of £517 million: the top 20 grew sales by 10% and EBITDA by 12%. With EBITDA margins of 23%, this is a portfolio of high quality businesses.

Many of the businesses we hold are adapting rapidly to new technology, especially cloud-based software, which is an area of real expertise in the management team. They are riding the wave of what has been called the Fourth Industrial Revolution—the adoption of new technology that is revolutionising traditional businesses. HgCapital aims to create industry champions.

What could concern any potential investor? These are businesses being helped to grow—last year employment in the businesses we hold rose by 4%--so this is not growth through cost-cutting or selling assets. The purchase of each business is funded by an optimal blend of equity and borrowing, based on the capacity of the cash flow from that business to service its debt; the Trust does not add risk by borrowing against the portfolio, although we have a standby facility, should we need to raise funds for a short period.

The Board of the Trust and the partners and staff of the manager share great confidence in our prospects. Altogether, we hold more than 5% of the equity ourselves. Seeing such commitment in itself makes the Trust worth a look. Find out more at the HgCapital website.