Strong annual results from HgCapital Trust (HGT ) confirm why the £2.3bn private equity fund is one of the highest-rated stocks in its unloved sector.

The investor in unquoted accounting software providers and other technology support companies –  which it invests in through funds managed by Hg – delivered a total 11.1% investment return last year with net asset value (NAV) at 31 December of 498.6 per share, which it first reported in a trading statement early last month.

It has since updated the NAV to 500.4p per share in February.

However, the shares rallied to generate a much better 26.2% total return in 2023 with two dividends included, as the discount, or gap, to NAV narrowed from 23% to 13%.

Four profitable disposals amounting to £191m in 2024 have maintained the momentum, with the shares advancing 6% this year to close last week at 461.5p, lifting the current one-year total gain to 31%.

This has narrowed the discount further to 7.8%, although Jefferies analyst Matthew Hose estimated that after fees and currency movements, the current NAV was 498.5p per share, leaving a discount of 7.4%.

Either way, that is much narrower – and better – than HGT’s one-year average discount of nearly 18% and the current average 19% discount of its peer group, excluding the £24bn 3i Group (III ), which stands on a 25% premium and is by far the highest-rated private equity fund.

HGT shares have eased 2.5p, or 0.5%, to 459p this morning, with Hose rating them a ‘hold’, saying the company had managed to ‘grind out’ good performance in difficult conditions.

‘While we expect the fund will see both an increase in deployment and exits during 2024, the high level of fund-level liquidity should still present it with multiple capital allocation options,’ the analyst said.

HGT chair Jim Strang said falling inflation and hopes of cuts in interest rates this year led to an increase in deals in the second half of 2023 with the company achieving an average 25% uplift on 2022 valuations in £324m of disposals.

‘The portfolio maintained strong underlying performance over the year with sales and Ebitda [earnings] across the top 20 investments (76% of the portfolio) growing at 25% and 30% respectively,’ he said.

‘Investment activity was notably lower in the first half of 2023 than seen in previous years, as the manager took a cautious stance on investment activity. However, a stabilisation in market conditions supported an increase in activity for the kind of highly sought-after companies that constitute the portfolio, throughout the second half of the year,’ Strang added.

Companies in the portfolio were valued at a full-looking but unchanged multiple of 26 times earnings.

David Toms, Hg’s head of research, said HGT’s companies maintained their valuations and profits because of the strength of their business models, with 90% recurring revenues and margins of over 30%, coupled with the ability to grow earnings organically by 10-15% a year.

‘These characteristics provide exceptional resilience when the cycle swings downward and form a stable platform for accelerating growth when market conditions recover,’ he said.

HGT has this year reinvested £148m into four investments – mostly top-ups to its existing holdings in software provider Visma and insurance broker GGW.

That’s left it with £700m of cash and liquid resources, equal to nearly a third of its assets after the payment of the final 4.5p dividend, which brought the total distribution for the year to 6.5p a share, down from 7p in 2022.

The trust has outstanding investments commitments of £957m to make in Hg funds over the next three to four years, equivalent to 42% of assets, giving it investment cover of 73%.

Over five years, HGT has provided a 156.3% total shareholder return – the third best in its 17-strong sector, behind only Oakley Capital Investments (OCI ) on 206.5% and 3i Group with 218.5%.