HgCapital has long been my favourite way of playing the listed private equity space – via a single manager rather than a fund of fund. It’s got a cracking long-term track record and it seems very focused – on Europe, on mid-market size and on certain sectors such as business services and business-related IT. Also, on a small point, Hg has gone out of its way to improve reporting to its investors and its reports and accounts are a credit to the whole sector. Here’s a fund in a difficult sector that is going out of its way to communicate properly with its investors.

This is all to the good but should we continue to keep holding the fund? My own concerns centre less upon the fund specifics, rather on the sector. I worry about the multiples on many current M&A deals. I also worry that too much money has been raised in PE LLPs which will now be badly deployed on deals. I also think we are late cycle in stock market terms.

[ Basic fund details: HgCapital Trust trades at -5.5% to its August proforma NAV, compared to a peer group average discount of -20.3%. The current dividend yield is 2.4%. ]

This week we had HgCapital’s interims. Here’s Canaccord’s quick summary of the results.

“NAV/shareholder total returns were 8.3% and 11.3% vs. 1.7% for the FTSE All Share. Strong underlying profits growth added 130pps, uplifts on carrying value of investments sold added 57pps while higher valuations used on a number of investments contributed 51pps. Over 10 and 20 years, the shareholder total return has outperformed the FTSE All Share benchmark by 3.8% and 8.1% respectively….

A significant majority of investments are performing ahead of their previous financial year while the top 20 investments, which represent 90% of the portfolio, have reported weighted sales and EBITDA growth of 23% and 19% over the last 12 months. This strong growth is reflected in a relatively high EV to EBITDA multiple of 16.8x, while high levels of cash generation enables Hg to use debt to gear returns, with the Debt to EBITDA multiple of 5.3x.”

Key issues worth noting include:

Broadening the investment universe: According to Canaccord “As HgCapital Trust has grown, it has progressively increased the upper size of businesses in which it invests. Earlier this year, it committed £150m to the Hg Saturn Fund; this will invest in companies with an enterprise value of £1bn or more, and which will have the same technology and tech-enabled business model as the existing strategies. In March HGT committed £75m to another ancillary vehicle providing Transition Capital to companies with an enterprise value of £50-100m.

Taking profits. “Over the past 18 months the company has sold investments with expected cash proceeds of over £420m in market conditions which the manager has described as “hot”. The manager expects further cash proceeds from realisations and re-financings before end-2018. The manager is investing selectively in situations where it has a unique angle and has developed extensive knowledge of the business – so far this year, the company has invested £183m in seven new investments and four follow-on investments.”

Balance sheet: Here’s Matt Hose from Jefferies: – “Cash balances at the period-end were £154m, or 20% of NAV, although following the announcement this morning of the £15.4m investment in Brightpay (the maiden Transitional Capital investment), pro-forma cash has fallen to £139m. Looking at the investment and realisation activity YTD, encompassing £198m of investments versus £211m of realisations (including refinancings), HGT has actually done very well in deploying capital amid tough market conditions. This is likely a testament to the depth of its sector relationships and expertise, but the increasing breadth of its investment universe, book-ended by Hg Transition and Hg Saturn, should also begin to be helpful. Pro-forma outstanding commitments are £475m, expected to be drawn over the next 2-3 years”.

.Dividend: An interim dividend of 16p per share has been declared (ex date: 09/20/18), with the board anticipating recommending a final dividend of not less than 30p per share.

So, what’re the views of analysts covering this hugely popular stock?

Canaccord Genuity’s view: HgCapital gives investors exposure to a portfolio of 30 companies with strong growth characteristics that are expected to perform across the economic cycle. We highlight that Hg has Europe’s largest technology PE team with 85 investment professionals and an extensive network of contacts. The past few years has been an exceptional period for HgCapital that has underlined the strategic value. That said, the current maturity profile (around 70% of investments are now less than three years old) and cash levels (20% of NAV) are likely to impact shorter term returns. On balance, we still expect a progressive NAV from a healthy portfolio and we retain our BUY recommendation.

Matt Hoset at Jefferies: HGT continues to make good progress against multiple headwinds – a testament to the strength of its investment proposition. So far the headwinds have been a relatively high cash-weighting and a lofty portfolio valuation, but recent portfolio activity entails that the immaturity of the holdings could also begin to weigh on near-term returns.

Liberum: HgCapital Trust targets investments where technology offers scope for enhancement. Using its team’s expertise and knowledge, the company has delivered consistently strong growth in sales and EBITDA of the underlying assets, as reflected in the H1 2018 results.

 My own take? I still rate HgCapital very highly and although I have some concerns about the increasing size of its new deals, I still think this is a well-run outfit. If you’re already holding it in your portfolio I see nothing in these results to encourage you to sell. Equally though, unless you are drip feeding in via a monthly savings account, I see no reason to buy the shares in this fund at current prices. My guess is that there will be better times to buy the shares, probably after a market correction – especially in technology.