Why our 20% trust discount is a bargain

TL;DR

HG Capital purchases profitable business-to-business software companies and focuses on long-term value creation through majority ownership and operational support.

Transcript

foreign ER interview Our Guest today is Luke Finch of HG Capital the private Equity Group which manages HG Capital trust Luke thanks very much for coming in morning thanks for having me so you invest in a basket of high quality business to business software companies are you paying a premium for these types of stocks and is there a comparison we ca... Read More

Key Insights

• ⏳ HG Capital pays a premium for private acquisition of comparable businesses to those listed on US exchanges, typically 20-25 times forward cash flow.
• 💪 The portfolio exhibits strong profit margins and revenue growth, with a significant portion driven by M&A activity.
• 🍉 HG Capital emphasizes long-term ownership, aligning capital and management incentives, and benefiting from operational support across its portfolio.
• 🔬 The firm finds opportunities for value creation by investing in unglamorous but essential software sectors that improve professionals' efficiency and compliance.
• ❓ Valuations of HG Capital's portfolio take into account earnings growth, comparable transactions, and exit valuations, which have remained resilient despite market volatility.
• 🇨🇷 Higher interest rates can impact the cost of funding for portfolio companies but may also drive greater demand for software solutions that improve efficiency and reduce costs.
• 🙈 Private Equity as an industry has endured and adapted despite varying cost of capital environments, with the current market correction seen as a return to more normal conditions.

Questions & Answers

Q: Are HG Capital's investments focused solely on profitable companies?

Yes, the majority of the portfolio consists of highly profitable businesses. Occasionally, the firm invests in companies on the path to profitability if their core customers show profitability.

Q: How does HG Capital support the businesses it invests in?

HG Capital aims to take a majority stake in companies and works with management to implement a long-term plan for growth and improvement. The firm provides operational expertise and shares best practices among its portfolio companies.

Q: Can you provide an example of a company where HG Capital created significant value?

One example is Visma, where HG Capital's support allowed the company to expand through M&A, innovate products, and successfully transition to a SaaS model. This resulted in a substantial increase in enterprise value over multiple five-year cycles.

Q: What areas within the business-to-business software sector does HG Capital find exciting?

HG Capital focuses on areas such as tax software, accounting software, compliance software, and operating systems for healthcare. The firm seeks consistent growth and recurring revenue rather than rapid growth in infinite markets.

Summary & Key Takeaways

• HG Capital invests in profitable B2B software companies, targeting those with high profit margins and strong cash flows.

• The portfolio has shown consistent organic revenue and profit growth, with M&A playing a significant role in value creation.

• The firm takes a long-term approach to ownership, aligning capital with management and implementing operational improvements.