Results centre

Despite the challenging macro-environment backdrop and ongoing volatility in the public software markets, key operating metrics across the HgT portfolio continued to show encouraging progress in Q1. Specifically, companies reported LTM sales growth of 16% and EBITDA growth of 19% respectively, while EBITDA margins were 34%. The portfolio continues to grow significantly faster than typical public companies and to generate significant free cash, a trend that has been in place for some time.

The broad-based sell-off in the software sector, substantively driven by fears over the disruptive threat of AI to existing businesses, has been largely indiscriminate with little distinction between the many different types of businesses that are found across the software sector. Hg targets a range of technology related investments according to a disciplined investment model focused on vertical software companies with very specific characteristics: notably those with proprietary datasets, where outputs must be 100% accurate and where deep, embedded customer and domain knowledge are defining factors. While all technology assets will be impacted by the adoption of AI, the Hg portfolio companies are well placed to see their specific value propositions enhanced by AI integration rather than to be replaced altogether. Indeed, Hg continues to lead the thinking on how such effective augmentations and collaborations can be made.

Recent exit events, where strategic buyers have acquired assets at premiums to their carrying values, serve to demonstrate not only the appropriateness of the Hg valuation approach but also the success Hg have had in developing a portfolio which is positioned to be a net beneficiary of the AI transformation across the software industry. The level of time and resource Hg are investing in this initiative is of real significance with peer investors looking to Hg as ‘leading the thinking’ in how to drive successful AI transformation at scale.

Nonetheless, over the course of the period, the positive effect of continued strong trading performance (+5% contribution) was offset by a material contraction in the valuation multiples of comparable companies that make up the peer valuation baskets according to the HgT valuation policy. Historically, we have observed that c.20-40% of the movement in public market valuation multiples flows through to HgT portfolio valuations, both in positive and negative markets. The average multiple for the IGV software index declined by c.25% in Q1, with the -9% impact on HgT’s portfolio from multiples towards the top of this range, and in-line with the guidance provided with the release of the Company’s FY25 annual report.

The impact of these combined effects, resulted in a NAV per share decrease of 5.4% for the quarter while HgT's share price declined by 22.9% over the period, broadly in line with the decline in the IGV index.

At this time of elevated risks and uncertainty, the Board remains focussed on four major areas. These are monitoring the portfolio trading performance, the capital structures of the portfolio companies, ensuring the Hg deal machine continues to operate effectively and finally, and most importantly of all, taking all necessary steps to support the long-term success of HgT.