Is it worth buying shares in a private equity investment trust?

Most private equity investment trusts have been languishing at double-digit discounts for the best part of two years. But shares in the HgCapital Trust have finally caught up with their net asset value, and now even trade at a small premium.
The £2.4 billion fund, also known as HgT, specialises in everyday technology businesses that cannot be found on the public market. These are not the exciting high-growth companies that other tech-focused private equity funds often favour, but the more pedestrian B2B software that businesses need to run their daily operations.
The central idea at HgT is that, as the population ages, there is a growing opportunity for the automation of workplace processes. A more expensive workforce means businesses will increasingly turn to software to become more efficient.
HgT’s single biggest investment is in Visma, a tax and accounting software provider for small to medium sized businesses in northern Europe. The Norwegian business makes up 12 per cent of its portfolio, with the fund’s stake valued at £347 million at the end of September. This was followed by Access Group, another business management software company which focuses on UK mid-market organisations. This makes up 10 per cent of its portfolio, at £293 million.
Around a third of the portfolio is in tax and accounting technology, followed by 21 per cent in enterprise resource planning and payroll, 19 per cent in legal and regulatory compliance. The rest of HgT’s investments are spread across insurance, fintech, technology services, healthcare IT and automation and engineering. Crucially, most of these companies follow a software-as-a-service or “SaaS” model, which means their revenues are subscription-based, recurring and have very low customer churn.
The tech investing “Rule of 40” applies to much of the portfolio too, which is the idea that high-quality SaaS business should have a revenue growth rate and profit margin that together add up to 40. At HgT, there is a 12 per cent organic revenue growth rate and a 34 per cent adjusted cash profit margin for its top 20 investments, which together account for three quarters of the portfolio.
The fund’s most recent update showed its net asset value in the third quarter slipped 0.9 per cent, though that was mostly due to currency movements. Its underlying portfolio performed well: at its top 20 holdings, sales growth in the previous 12 months averaged 20 per cent, and adjusted cash profits at 24 per cent.
A common worry with private equity funds is there could be a dangerous lag between the valuation of the holdings compared with their listed rivals. So far the evidence suggests HgT has taken a reasonable approach. In its 2023 financial year it recorded £324 million worth in realisations, at an average uplift of 25 per cent to the book value as of the end of 2022.
As of the end of September this year, realisations are even higher, at £349 million, representing 14 per cent of the fund’s opening portfolio value, and at an average uplift of 16 per cent to carrying value.
Given the activity in the fund, it is perhaps not surprising the shares have rallied considerably in the past year, up by just under 40 per cent. As such HgT is now one of the few private equity investment trusts trading at a premium to its net asset value. It is relatively small, at just 1.7 per cent, but it is in stark contrast with an average discount of 33 per cent in the sector, excluding 3i.
Its longer term record is decent, having delivered a share price return of 20 per cent per annum in the five years ended in September, comfortably ahead of its benchmark, the FTSE All-Share index, which was up by 6 per cent in the same period. For a fund providing a meaningful route to diversification outside of the main stock market, but with a rigorous, quality-focused approach to picking companies, HgCapital looks a strong pick.
Advice BuyWhy Route to investment in private, high quality European tech
This Belfast-based technology company has had a tough year. Customers have pulled back on spending on IT projects, prompting two negative updates in recent months and pushing shares down to lows not seen since the pandemic. But the software company has the markers of a quality outfit — so are the shares now worth buying?
Kainos makes most of its sales from its digital services division, where it develops custom digital platforms. The rest comes from a partnership with Workday, an American human resources software platform which offers ways for other businesses to digitally manage internal operations such as recruitment and payroll.
The FTSE 250 company has a highly profitable model, with gross margins at around 50 per cent, and a cash conversion rate of 75 per cent as of the end of September.
But recent trading has been difficult: half year results this week showed that revenues had slipped by 5 per cent to £183.1 million, and adjusted pre-tax profits nudged up by just 1 per cent to £38.2 million, with trading down among both its public sector and corporate clients.
There are some reasons to be optimistic. While the company struck a cautious tone on its near-term view, it noted that the new Labour government has expressed a determination to improve public services and healthcare provision, pushing for efficiencies and leveraging the potential for AI technology. This bodes well for Kainos, seeing as public sector clients account for just over a third of group revenue.
Cash is still strong too, with the company increasing its interim dividend by 13 per cent to 9.3p a share, as well as setting aside £30 million for a new share buyback programme.
This column last rated Kainos as a hold in May, citing what appeared to be a full valuation, when it traded at 27 times forward earnings. The recent fall in the share price means this multiple has fallen to 23, which is certainly not bargain territory, but at a significant discount to its five-year average of 34.8.
Advice BuyWhy Wobble in recent trading but strong fundamentals