Buy ‘boring’ HG Capital as 30% discount persists
Analysts at Winterflood Securities have highlighted a ‘buying opportunity’ in Hg Capital (HGT) as its shares continue to lag on a near 30% discount to net asset value (NAV).
The £1.8bn private equity trust has seen shares plummet 20.6% since the start of the year after a sell-off in software stocks wiped a quarter off its value in a matter of days.
The initial slide was triggered by artificial intelligence developer Anthropic releasing a new autonomous legal productivity tool, raising existential questions over the long-term relevance of software-as-a-service companies − a sector the trust specialises in.
The broker’s comments came alongside healthy full-year results for the trust, which delivered a NAV total return of 4% over the 12 months to 31st December .
The managers invested £357m into new companies, while exits brought in £215m. Another positive was the average uplift on realisations of 25%, with GTreasury most notably selling at 97% premium.
Despite the positive exits, shareholder returns fell 4.9%, already negatively impacted by broader market volatility and a rotation of capital out of software and into hardware which accelerated in the new year.
Back in February, the HGT board judged the sell-off ‘indiscriminate’, creating an attractive opening for new investors. Co-manager Matthew Brockman had previously commented that although recent releases from large AI companies had demonstrated a ‘step change in performance for business applications’, incumbent software developers maintain a ‘huge advantage’ in developing their own AI tools having ‘spent years mastering a difficult workflow, using a complicated set of rules and processes combined with proprietary data and deep integrations, both up and down stream.’
Today’s results highlighted the trust’s proficiency in this area, with its AI incubator ‘Hg Catalyst’ employing more than 80 engineers, product managers and designers to accelerate AI product development, which directly contributed to the GTreasury exit uplift.
The board stressed continued demand for HGT’s assets from both strategic and financial buyers, pointing to Hg’s partnerships with Anthropic, Replit and Cognition Labs. It also cited Hg’s share of all European buyout capital raising approached 30% of the total for 2025.
Hg’s Head of Research David Toms added: ‘We are already selling AI-first applications to customers across many businesses in the portfolio… they look to trusted, existing providers able to provide integrated new capabilities into established applications, seamlessly linked to years or decades of proprietary data and workflows.’
‘Our current budgets show a significant EBITDA benefit from AI initiatives,’ he said.
While the likes of JPMorgan Cazenove downgraded the trust in February, Winterflood continues to highlight a buying opportunity, believing it to be ‘well-placed to incubate the companies that will take market share by incorporating AI across its platform.’
Analyst Shavar Halberstadt said: ‘We believe that their suite of ‘boring’ and ‘mission-critical’ software will be last to be disrupted, as these are not the most expensive licenses in the corporate technology stack and their output must be trusted at all times.
‘Generative AI is certain to change the face of the software landscape, and a wide range of scenarios has been tabled from Citrini to Jensen Huang. At a double-digit discount, we think HGT is a very sensible horse to back, unless and until we see actually adverse portfolio developments, which these annual results do not include.’
Industry insiders from Valhalla Ventures and Jupiter Fund Management were of the same view, moving in to buy shares shortly after the first slump.
HGT has delivered a ten year share price total return of 18.9% per annum, outperforming the FTSE All-Share Index by 10.5%. In response to a widening discount, it has initiated a buyback programme for up to 14.99% of issued capital, or 68.6m shares.
