HgCapital Trust, one of the best performing private equity funds in the UK stock market, launches its first share issue in nine years.
HgCapital Trust (HGT), one of the best performing private equity investment trusts, has launched its first share issue in over nine years.
The £809 million company is looking to raise up to £80 million – just under 10% of its shareholder capital – to invest in the technology-focused funds of its private equity manager Hg.
In the past 20 years the company says it has achieved underlying annual investment returns of 14.5% from investing in the funds of Hg, which specialises in the buyouts of medium-sized software and service firms.
It is particularly keen on accounting and tax software providers with over 30% of its assets invested in Visma of Scandinavia, Sovos Compliance of the US and Iris in the UK at the end of April.
Data from Morningstar show that in the past five years HgCapital has generated total shareholder returns of 141.9%, just behind the 148.7% of JPEL Private Equity (JPEL), a £218 million rival that is being wound up, and 3i Group (III), the £10 billion sector giant, which has returned 198%.
HgCapital’s offer to buy new shares free of stamp duty closes at 1pm on Thursday. It has been priced at 217.1p, a 1.1% premium to the net asset value (NAV) per share at the end of May and a small discount to last week’s closing price of 217p. Numis Securities is broking the issue.
Private equity investment trust share issues have been rare in the past decade as the listed funds have slowly recovered from their mauling in the 2008-09 financial crisis, when over commitments and high debts battered their stocks.
Excluding 3i, which is highly unusual for trading on an expensive 26% premium over NAV, most private equity trusts stand on wide discounts of between 11% and 47% below their value of their investments.
HgCapital has recently become another exception, however. Unlike their rivals, its shares are no longer cheap having re-rated to a modest 2% premium, up from their average 4% discount of the past 12 months.
Although no longer undervalued, the new premium rating allows HgCapital to expand and issue new shares at a price just above NAV, thus avoiding diluting existing investors.
Hg has told the trust’s board that it expects its partners and staff will invest at least £10 million in the share placing or – if the offer is oversubscribed – buy shares in the open market.
Launched 30 years ago, HgCapital invests exclusively in the funds of Hg, which span out of Mercury Private Equity in 2000.
Justifying the cash call, the company said its level of liquid resources of £97 million, or 12% of net assets, was below the average it would typically invest in Hg funds a year.
Meanwhile, it was aware of an attractive pipeline of investment opportunities that might open up Hg funds in the next six-to-12 months.
‘The board believes it would be advantageous to shareholders for the company to be able to make commitments to future Hg fund vintages of a scale where the company’s commitments are in the range of 10% to 15% of the total Hg fund size, as they have been able to do historically,’ it said.
In addition, it said it wanted to maintain the current level of co-investments with Hg at 15%. Co-investments are highly prized by private equity investment trusts as they enable them to invest in companies alongside their fund managers free of charge.
Last month HgCapital undertook a ten-for-one share split to improve liquidity in its stock, which today eased 0.5p to 216.5p.