Hg’s review - hgcapitaltrust.com/media/Files/H/Hgcapital-Trust/... · Hg’s review HgCapital Trust plc| Annual Report & Accounts 2017| Hg’s review 19 Building businesses that

Hg’s review

19HgCapital Trust plc | Annual Report & Accounts 2017 | Hg’s review

Building businesses that change how we all do business Hg is an investor predominantly in unquoted technology and technology-enabled service businesses.

Our business model combines deep sector specialisation with dedicated portfolio management support. Hg invests primarily in growth companies in expanding sectors via leveraged buyouts across Europe.

Hg’s vision is to be the most sought after private equity investor in Europe, being a partner of choice for management teams, so as to produce consistent, superior returns for the Company and other clients and a rewarding environment for our staff.

References in this Annual Report and Accounts to the ‘portfolio’, ‘investments’, ‘companies’ or ‘businesses’, refer to a number of buyout investments, held as:

• indirect investments by the Company through its direct investments in fund limited partnerships (HGT LP, HGT 6 LP, HGT 7 LP, HGT 8 LP, HgCapital Mercury D LP (‘Hg Mercury’) and HGT Mercury 2 LP) of which the Company is the sole limited partner;

• a secondary purchase of a direct interest in Hg’s 6 fund through HgCapital 6 E LP (‘Hg 6E’), in which the Company is a limited partner; and

• direct investments in renewable energy fund limited partnerships (Asper Renewable Power Partners LP (‘Asper RPP I LP’) and Asper Renewable Power Partners 2 C LP (Asper RPP II LP’)), of which the Company is a limited partner.

Hg Pooled Management Limited was authorised as an Alternative Investment Fund Manager with effect from 22 July 2014.

For further details, refer to pages 120 to 122 of this Annual Report.

20 Hg’s review | Annual Report & Accounts 2017 | HgCapital Trust plc

Overview

Investment strategyHg primarily focuses on buyouts in technology and tech-enabled businesses focused on end-market clusters with enterprise values (‘EV’) of more than £30 million to £3 billion predominantly, but not exclusively, in the UK and Northern Europe. These companies are small enough to provide opportunities for strategic and operational improvement and to offer multiple exit options across market cycles, but with the scale and potential to attract high quality management.

We believe these markets offer a high volume of investment opportunities with proven financial performance and strong market positions.

Clear investment criteriaHg applies a rigorous approach when evaluating all investment opportunities. Our objective is to invest in the most attractive businesses, rather than be constrained by a top-down asset allocation.We seek companies predominantly in technology and technology-enabled

services that share similar characteristics, such as: high levels of recurring or contracted revenues; a product or service that is business critical but typically low spend; low customer concentration; high customer loyalty and low sensitivity to market cycles; and often providing a platform for merger and acquisition (‘M&A’) opportunities. We believe that these companies have the potential for significant performance improvement.

Introduction to HgWith close to 130 staff in investment offices in the UK and Germany, Hg has funds under management of over £9 billion serving a range of highly regarded institutional investors, including private and public pension funds, charitable endowments, insurance companies and family offices, alongside the Company. We have progressively invested in and strengthened the business of Hg over the years, to establish a significant competitive advantage.The Company is the largest client of Hg, which has been contracted to manage the Company’s assets since 1994. The Company offers investors a liquid investment vehicle, through which they can obtain an exposure to Hg’s diversified network of private equity investments with minimal administrative burdens, no long-term lock-up or minimum size of investment, and with the benefit of an independent board and associated corporate governance.

Accounting / Tax

Human Resources

Legal

Insurance

Wealth Management / Asset Management

Capital Markets

Auto

Healthcare

Supply Chain Risk

TechnologyInfrastructure

TEC H N O LO GY

SE R VIC ES

IND

USTRIAL TECHNO

LOG

Y

Business critical need delivered as software, service or component

Subscription or repeat revenue model

Utilising years of accumulated IP

Fragmented customer base

Business modelHg “sweet spot” attributes

Deep sectorknowledge

“Sweet spot”

Focused on end‑market clusters

“We focus our investments in software and tech-enabled service & industrial companies with specific business characteristics that we believe have the ability to grow across market

cycles and are attractive to future buyers.” Nic Humphries, Senior Partner, Hg

Active management of businesses in our networkBy virtue of the fact that Hg repeatedly invests in specific business models, our dedicated Operations Innovation (‘OI’) Team has been able to tailor a differentiated approach to driving value creation during our ownership. Following each investment, our OI Team works with management to focus on a set of operational levers that are key to performance in an Hg ‘sweet spot’ business model: sales, digital marketing, pricing, customer success, IT and data analytics. For each of these levers, the OI team has codified the Hg experience and best-practices into set ‘plays’ that are deployed together with management.

The nature of support provided by Hg can take a variety of forms. At a Board level, we often appoint a member of the OI team as a non-executive director responsible for applying active, results-oriented corporate governance.

Beyond the boardroom, members of our OI team provide either direct support through hands-on best-practice project work, or collaborate with management teams to draw on expertise from our proprietary network of specialists and Operating Partners, who each bring a specific, operational specialism to company situations.

One of the most powerful ways the OI team motivates change is through peer-to-peer collaboration. Over the first few months of 2018, for example, 27 M&A executives, 62 CTOs/CIOs and 130 Sales & Marketing leaders will have spent up to two days together essentially sharing and adopting each other’s best practices. By way of example, across these Hg Forums: Visma will explain how to build in-house capabilities to complete and integrate 20 acquisitions a year; Allocate will explain to the CTOs how to transition from on-premise to cloud software in less than a year; and Sovos will help sales leaders understand what systems and processes are required to generate $10 million in sales leads in a month.

“Our differentiation is how focused we can be on a few high impact areas that are relevant

to all our tech and services companies. The OI team members are experts in their areas, and they work the same topics over and over again

from one company to the next.”Amanda Good, Partner, Hg

“The speakers, the location, the entertainment and most of all, the peers I met at the Hg CEO & Chairman forum, were all first class. They made me feel inspired, excited,

pleased and reassured to be backed by Hg.”Geoff Love, Chief Executive Officer of Esendex Group

Overview continued


“The threat of cybersecurity impact to any business, regardless of size, is very real and is only increasing as we continue to be more reliant upon online services and as the volume and nature of connected devices continues to grow. Protecting yourself

and your business does not need to be a complex task. However you do need to commit to, deploy and maintain effective levels of cybersecurity practices, policies and procedures, alongside layered technology solutions. Critically, an effective

understanding of cybersecurity from the board room to every employee, is a cornerstone of any successful defence. Cybersecurity is the responsibility of every employee, not just that of the IT team.”

Jason Richards, Operating Partner, Hg

Managing the cybersecurity riskBusinesses are facing an ever-increasing threat to their operations and finances through more frequent, sophisticated and targeted cyber attacks.

These attacks can impair business operations, generating a reduction in productivity and lost opportunity costs. They can also generate direct economic loss (via fines, ransom and fraudulent payments) and reputational damage. In the world of private equity this reputational impact can extend to the fund manager and is a direct threat to shareholder value.

However, it is possible to protect the investment and shareholder value of each company and, in doing so, demonstrate a well-managed business, potentially creating additional value at realisation.

We are very fortunate to have Jason Richards, a very well respected former Chief Information Officer, working directly with the OI team. Over the last year, Jason has created and implemented a standardised ‘end to end’ cybersecurity assessment for all the businesses in Hg’s network, employing industry best-practice frameworks and standards across non-technical (for example, risk management and education) and technical control areas (for example, network protection).

Attaching an overall Cybersecurity Maturity Score to each company provided an effective means to monitor and measure progress within each company and across the network. It also enabled us to benchmark each company against each other.

These insights have assisted us in targeting areas for improvement which have been supported in a number of different ways. For example:

• Organisations that were identified as having an opportunity to improve their management of cybersecurity risk, were provided a predefined ‘jump-start’ risk register and supporting instructions on how to define and quantify their cybersecurity risks.

• For businesses that find themselves under cybersecurity attack, or suspect they have been attacked, being able to call upon an external emergency incident response provider can be critical in fighting off the attack and/or determining the extent of the breach. We removed any friction associated with acquiring these services by negotiating an agreement with a world class partner, available to all our businesses.

While we are by no means ready to declare victory in the ever-changing landscape of security risks, our businesses have taken a huge leap forward in terms of understanding and readiness for what lies ahead.

Insight

Overview continued


A full description of Hg and our key staff is available at www.hgcapital.com

Hg succeeds through the analysis and understanding of new and emerging dynamics in the sectors and market clusters in which it invests. This requires profound knowledge of technology, markets and business practices. To this end, we employ exceptionally talented teams to identify and execute investment opportunities and accelerate value realisation during our ownership.

This specialisation – both in investment selection and portfolio management – requires significant resources and we have built a business employing close to 130 staff, including over 75 investment and other professionals.

Our people come from a range of backgrounds and experience including private equity, consulting, investment banking, accounting and industry specialists. Supporting these in-house resources, Hg‘s Operating Partners consist of a group of senior individuals with many years of experience in operational and strategic roles, as well as individuals with strong functional expertise in a variety of areas. In addition to this, they have all worked with Hg and other private equity firms over long periods.

Investing primarily in European businesses, many of which have a global footprint, requires time and a deep understanding of local cultures. Accordingly, our people come from around the globe, including ten European countries and the USA. Our partners have, on average, nineteen years’ experience in the management of private businesses.

Hg’s recruitment and selection processes are rigorous and agile which, along with our vibrant culture, allows us to attract and hire the best talent in our industry. We place a strong emphasis on delivering an experience that will encourage the best candidates to join us.

Positioning ourselves as a best‑in‑class recruiter

We have strengthened our talent identification processes on how we can best accelerate the development of our top performers within the business. We believe that this is the basis of effective succession planning.

Improving our ability to identify talent

Our people are highly motivated by, and committed to, delivering outstanding value to the Company, our other institutional clients, and our portfolio company leadership teams. They are engaged by their work, our values and the opportunity to grow to their full potential within Hg. Our values have evolved over many years and are embodied in our working culture; these are aligned with our performance review and compensation structures. Hg works hard to ensure our employees are engaged and we strive to improve levels of engagement, using independent external benchmarks.

Employee engagement

We are explicit about the behaviours we wish to encourage at Hg and have aligned training, coaching, performance feedback and incentives to our values. This focus includes both broad organisation-wide and leadership competency models, which are used as the basis for performance coaching, development and promotion.

Developing future leaders

Our people


Overview continued

A deep bench of colleagues, all working to target specific themes, not only allows us to invest in some great businesses but also to work with some of the most talented executives active in those sectors globallyMatthew Brockman, Managing Partner, Hg

Technology covers a broad range of markets. Driven by our deep sector approach, Hg’s Technology teams focus on specific sub-sectors, including: vertical market application software – particularly delivered via a Software as a Service (‘SaaS’) model; private electronic marketplaces; B2B media information/publishing; and datacentre operators.

Within these sub-sectors, we have invested in high quality businesses with diverse customer bases, which feature subscription-based business models generating predictable revenues and cash flows. The team regularly conducts top-down research within the wider sector, in order to continue to identify and assess further repeatable investment themes where we can invest time to develop proprietary expertise.

Our highly resourced, dedicated team means that we are well placed to identify, assess and complete investments quickly and thoroughly. We work to bring our experience and expertise to support management teams, aiming to have the knowledge of a trade buyer, coupled with the speed and focused delivery of a financial buyer. The team benefits from the depth and breadth of many years of private equity experience in technology, and is complemented by an extensive network of industry experts and advisers.

Given the breadth of opportunity in European technology, Hg is currently investing in the sector on behalf of the Company and from two funds, Hg 8 and Hg Mercury 2; targeting buyouts in companies with typical enterprise values of over £30 million and up to £1 billion.

Hg Saturn will also invest in this sector in businesses which have already reached significant scale; typically with enterprise values of over £1 billion.

In aggregate, the funds we have to invest across the sector allow us to field significant teams to identify and negotiate investments, while providing a very comprehensive resource for the management teams that we support.

In order to find businesses where we can add substantial value, Hg applies a deep sector focus, predominantly targeting buyout investments in technology and technology-enabled service companies.

Hg’s sector teams combine the domain knowledge and expertise of a trade buyer – giving them enhanced credibility and the ability to make confident decisions – with the speed of execution and discipline of a financial investor leading to high conversion rates on deals.

This deep sector focus is channelled through a rigorous, research-based investment process; systematically identifying the most attractive growth sub-sectors and business models primarily in Europe; and through repeated investment in them, our deal flow is optimised and our returns improved.


Sector specialisation

Deep sector focus Technology

Our investment in Services focuses on companies which provide business-critical services with high levels of intellectual property, large fragmented customer bases, preferably with a repeat or recurrent model and often with an increasing degree of technology enablement. The Services sector is a large and wide-ranging segment which is traditionally split into ‘horizontal’ business models such as: business process outsourcing, facilities management, or testing and inspection. In contrast, our investment approach concentrates much more on specific end markets and sub-segments, which we believe lead to attractive business model characteristics. We have then invested time to develop a strong understanding of the industry dynamics through identifying service companies that sell into those specific sub-sectors.

We target businesses with leading positions within a niche, typically reflected by strong margins; and we aim to grow and scale these businesses, either organically within existing markets, or through acquisition.

Existing investments include companies that serve a range of industries such as: the leasing and maintenance of business-critical equipment, employment law and health & safety; book-keeping and payroll services; international business expansion services; and insurance distribution. In all of these companies, the improved delivery of service via technology is an important theme.

Our industrial technology investing is focused on growth businesses in particular in the DACH market, which is characterised by a large number of highly successful, family-owned businesses (the “Mittelstand”). We have earned a reputation as a preferred partner for many of these Mittelstand companies to scale into international businesses.

The Industrial Technology Team, based in Munich, is located in the heart of an economic zone containing numerous high quality, cutting edge, technology-led industrial businesses, many of which have strong national or international positions in a specific niche sector, but with the opportunity to achieve further scale. Our thematic research within this sector has been concentrated over many years on the characteristics that define a strong industrial technology investment.

As a result, we have developed certain themes and business models that we regard as particularly attractive: aftermarket companies; product champions/niche manufacturers with tech-enabled and mission-critical products; and smart distribution models. These themes are overlaid with specific industrial sub sectors where we have a strong understanding.


Sector specialisation continued

Services Industrial technology

Case study – Sequel

About Sequel Business SolutionsSequel Business Solutions (‘Sequel’) is a leading provider of software and services to the Lloyd’s of London and the broader insurance markets, headquartered in London with operations in UK and Spain. The company was founded in 1993 and has since grown to become one of the leading insurance software specialists in the UK. Sequel has an attractive customer base, comprising some of the leading, most highly respected companies in the commercial insurance space, which rely on Sequel’s core underwriting platform, Eclipse, to run and optimise their operations.

Additionally, the company also provides innovative software solutions for related work streams such as: risk analytics (Sequel Impact); claims processing (Sequel Claims); reinsurance (Sequel Re); and placement (Sequel Origin).

Why did we invest in Sequel?Hg identified Sequel through origination work within the insurance software segment. As the Hg team was searching for an attractive entry point into insurance technology, Lloyd’s and complex insurance segments were identified as particularly attractive niches, within which we identified Sequel as having a strong position, as evidenced by stable relationships with key customers (such as Willis, Brit and Markel) which are seen as technology leaders in the Lloyd’s and broader commercial insurance market.

25

30

15

10

5

20

–

June year-end Revenue EBITDA

£million

21.0

8.6

18.3

6.9

26.2

9.2

2015 2016 2017

Revenue CAGR 20%

EBITDA CAGR 15%

Sequel’s core technology offering was of very high quality and, when combined with a strong reputation for service delivery, commanded a premium position. In addition, innovative new products such as Impact, Claims, Re and Origin were in early commercial stages and could provide significant upside.

Financial performance

www.sequel.com Sector: Technology Geography: UK

Supporting management in delivering organic growth, recurring revenue transition and product expansion


£ million

15

5

20

10

25

–Total

invested

£4.4m

£12.5m / 161% upli� at exit

Total returnas at Dec 2016

£7.7mDec 2016

carrying value

£2.2m realised prior to Dec 2016

Total returnof £22.4m

£20.2mrealised in

2017

£2.2m realised prior to Dec 2016

The numbers in this chart relate to the Company’s share of Hg’s investment in Sequel.

2001 2012 2013 2014 2015 2016 2017

Sequel founded as a Professional Services business

Mario Garcia joined Sequel and took charge of transi�oning the company

towards a so�ware business

Management transi�on with Mario Garcia taking over as CEO

Sequel Impact launched

Sequel Re launched

VeriskacquiresSequel

Hg invests in Sequel Business

Solu�ons

Sequel Claims

launched

“I would like to thank Hg for being a great partner as we developed Sequel into the leading provider of software to the complex insurance market. Together, we transformed the business.”

Mario Garcia, CEO of Sequel

5.1xInvestment return multiple of cost

77% p.a.Gross IRR

Total returnThe investment processHg partnered with the management of Sequel, led by CEO, Mario Garcia, in July 2014, and supported his team in the transition of ownership from the founder, as well as helping to execute their strategy to become a clear leader in Lloyd’s and build a strong product focused business.

How did we support them and create value?Sequel has been transformed under Hg’s ownership period. Its core Eclipse product set was broadened to a full suite supporting all the complex risk activities of insurers and brokers, including risk aggregation, claims management and re-insurance. The suite was also separated into modular products: for risk (Sequel Impact); claims (Sequel Claims); re-insurance (Sequel Re); and origination (Sequel Origin), allowing more light touch sales and implementations.

The modular product set, combined with a greater commercial focus (including building a professional sales organisation), led to a tripling of customer numbers. In parallel, Sequel’s business model rapidly grew its recurring revenue. In combination, this allowed Sequel both to grow total revenue by 13% p.a. since initial investment, while doubling the recurring revenue share to nearly two thirds during our ownership.

What was the exit?Confirming Sequel’s highly strategic position in the Lloyd’s and complex risk insurance market segments, Hg was approached by Verisk, a listed US data analytics business, in the Summer of 2017. Verisk was looking to gain a footprint in the UK insurance technology market and to access the complex risk insurance segment. The Company received £20 million, at an uplift to the December 2016 book value of 161% and delivered a 5.1x investment multiple and a 77% gross IRR over the investment period.


Case study – Sequel continued

About QUNDISHeadquartered in Germany, QUNDIS was created in 2008 from the merger of QVEDIS (previously part of Siemens) and KUNDO SystemTechnik and currently has more than 250 employees. QUNDIS supplies a full data management solution for the housing and utilities industries to collect, measure, and transmit consumption-dependent data for heating and water usage on an apartment unit level. This solution comprises a comprehensive range of sub-metering devices as well as remote data transmission technology including a cloud solution and data management software, serving the SME independent sub-metering supplier and building technology markets across Europe. QUNDIS’ products are sold in over 30 countries, with the largest markets being Germany and Italy.

Why did we invest in QUNDIS?QUNDIS has a robust business model with a proven track record of growth and recession resilience, having delivered 7% revenue CAGR over the period of our ownership from 2012 to 2017.

It benefits from a large installed base that generates a recurring and predictable revenue stream with loyal customers driven by the low spend nature of the product. A significant proportion of sales are replacement-related, also driven by regular upgrades to more advanced read-out solutions. New installations are increasing, due to more rigorous energy efficiency regulations across Europe, leading to the ability for further value creation potential via international expansion in adjacent countries. The business has a high quality, competent management team who re-invested a significant amount as part of the original transaction.

The investment processHg initially partnered with QUNDIS in May 2012, representing a continuation of Hg’s sector-driven investment strategy, seeking to partner with market-leading industry champions. Hg had been tracking the company prior to a sales process being launched at the end of 2011 and the Munich team had built a strong relationship with the QUNDIS management, enabling them to engage early in the sales process.

www.qundis.com Sector: Industrial Technology Geography: Germany

Establishing a clear technology leader

“QUNDIS and Hg have worked very well together over the last five years taking the company to the next level and increasing its breadth. We very much look forward to working within the new partnership, as we see multiple opportunities for further improving our solution offering.”

Dieter Berndt, CEO at QUNDIS


Case study – QUNDIS

£ million

25

10

5

15

30

20

45

40

35

–Total

invested

£12.5m

£9.8m / 29% upli� at exit

Total returnas at Dec 2016

£33.8mDec 2016

carrying value

Total return to date of £43.6m

£37.3mrealised in

2017

£6.3m Dec 2017carrying value

The numbers in this chart relate to the Company’s share of Hg’s investment in QUNDIS.

2012 2013 2014 2015 2016 2017

Acquisi�on of Amplitec, an ultrasonic heat meter specialist

Acquisi�on of Weconis for the development of

smart metering solu�ons

Introduc�on of new heat cost allocators, water meters

and smoke detectors

Hg agrees majority sale to the Kalorimeta group of companies

Hg invests in QUNDIS

Interna�onal representa�on in

three new markets is established

Merging of its two loca�ons; Mühlhausen and St. Georgen to form a new company headquarter in Erfurt

3.5xInvestment return multiple of cost

29% p.a.Gross IRR

65.0

16.7

93.0

33.0

68.3

17.0

63.4

15.0

67.4

19.8

71.2

21.5

80

100

40

20

60

0

June year-end Revenue EBITDA

€million

2015201420132012 2016 2017

Revenue CAGR 7%

EBITDA CAGR 15%

Financial performance

How did Hg support them and create value?Key value drivers during Hg’s investment period have been the consolidation of QUNDIS’ production facilities into a single new state-of-the-art site in 2013, and importantly the development of a highly-advanced gateway and software solutions to offer a comprehensive, market-leading remote read-out solution. Through its technological leadership and reputation as quality leader, QUNDIS has been able to develop further into new customer segments and service offerings on a truly European scale.

QUNDIS’ growth also continues to benefit from broader market fundamentals such as the mandatory actual consumption-based billing (under the European Energy Directive), which Hg identified as a driver when the initial investment was made. Overall, QUNDIS is a great example of tech-enablement transforming a business.

Performance improvementSince 2012, QUNDIS has broadened its customer base in the core markets of Germany and Italy and has built strong platforms to exploit the growing markets in France and other European countries. QUNDIS has established itself as a clear technology leader, providing some of the most advanced read-out solutions in the industry. We anticipate the enforcement of the European Energy Directive (mandatory installation of smart meters and likely move towards intra-year billing) will contribute to sustained growth rates going forward. In addition, under Hg ownership QUNDIS

transitioned into a full solution provider including cloud based data management and read-out software. As a result, QUNDIS delivered annual sales growth of 7% and annual EBITDA growth of over 15% during our ownership.

What was the exit?Following QUNDIS’ rapid growth and international expansion Hg agreed to the sale of the majority of the company in April 2017 and is looking forward to participating in the next development phase of QUNDIS in combination with the Kalorimeta Group of companies. This transaction totalled £44 million at an uplift to the December 2016 book value of 29%, and delivered a 3.5x investment multiple and a 29% gross IRR over the investment period.

Total return


Case study – QUNDIS continued


Why responsible investing is important to usFor Hg, Responsible Investing (‘RI’) means growing sustainable businesses which are great employers, have a low environmental impact and are good corporate citizens, whilst generating superior risk adjusted returns for the millions of pensioners and savers globally who are invested with us.

Across all our investments we look to create quality employment in sectors with low carbon emissions and to add value through revenue growth over the long-term. We want the businesses we invest in to be genuinely focussed on doing well for all stakeholders including employees, customers, suppliers, shareholders and the wider society. We firmly believe that responsible business practices help generate superior long-term performance.

As part of our RI approach, we take an active interest in how our companies manage environmental, social, and governance (‘ESG’) issues. We encourage, support and stretch the companies we work with to strive for best practice responsible business standards.

Our responsible investing journeyHg has been a signatory of the UN Principles for Responsible Investment (‘UNPRI’) since 2012 and since then we have continued to increase our ambitions and ESG commitments. In 2017, we hired our first full time executive dedicated to drive our commitment to responsible investing. As part of this we reviewed and updated our RI framework, policy and approach to set our ambition and ensure we focus on the ESG opportunities and issues most relevant for the types of businesses we invest in. Our new Responsible Business framework forms the foundation of our work moving forward.

Responsible investing

How we integrate Responsible Investing into our investment process

A signatory to the UNPRI since 2012.

Investment screening• When considering potential new investments,

we screen them against our exclusion list, which outlines the sectors, businesses and activities in which we will not invest.

• A red flag report identifies high level concerns arising from sectors, geographies and preliminary diligence results.

Due Diligence• During due diligence, we assess companies for

compliance with relevant laws in relation to environmental, social, governance, health and safety, bribery and corruption issues.

• We also consider the inherent ESG risk of the company and carry out an associated ESG review detailing risks and opportunities in relation to our Responsible Business framework.

Ownership• We take an active approach to managing ESG

during our ownership. This starts with an ESG onboarding and maturity assessment within the first months of acquisition to prioritise ESG topics and agree an action plan.

• In 2018, we are conducting a maturity assessment of our existing portfolio to identify areas for improvement where Hg can support the companies to realise their ambitions within and beyond our Responsible Business framework. This assessment will be updated at least annually.

• We organise face-to-face events for our management teams to share best practice, network and receive support.

Realisation• Upon realisation, we aim to articulate the

increased value from improved ESG performance with case studies and performance metrics.

growing sustainable businesses which are great employers, have a low environmental impact and are good corporate citizens

EssentialsThere are certain minimum ESG requirements that Hg expects from all our businesses. These include:

Governance and Business Integrity, such as code of conduct, appropriate controls, board composition and appropriate health & safety and grievance procedures.

Risk and Compliance, including compliance with all laws and regulations, active risk management, as well as standards and policies to combat bribery, corruption, money laundering and other malpractice.

Data and Cybersecurity, which includes Hg’s minimum standards for cybersecurity along with appropriate information protection practices and GDPR compliance.

EmployeesOne of the most important assets of our businesses are the employees. A diverse workplace with engaged and motivated employees is vital for growth and business success. We look at employees from four aspects:

Diversity of talent and equal opportunities irrespective of ethnicity, gender, disability and background.

Engagement and motivation by promoting transparent communications, health and wellbeing, learning opportunities, recognition and good leadership.

Grow businesses and talent, including organic job growth, healthy staff turnover, talent management and succession planning.

Purpose and culture, including appropriate and value driving vision, mission, values, norms and behaviours.


Know-how & Tools

Kno

w-h

ow &

Tools Know-how & Tools

Business

Responsible

Em ployees Society

Esse ntials

Data & cy b ersecu

rity

G overn ance

Risk & co m plia

nce

D iverse

En gage

G ro w

Purpose & cultu

re

Co m m unity

Enviro n m ent

TransparencyPositive relati

ons

Our responsible business frameworkHg’s Responsible Business framework outlines key ESG areas of focus and how Hg can support our businesses. The framework is used to assess prospects both before investment and businesses we own throughout our ownership. It focuses on three key areas:

Responsible investing continued

SocietyWe want all our businesses to strive for positive external impact by acting transparently and contributing to society through their business practice, charitable and community support and supplier and customer relations. Our businesses contribute to society in a number of ways:

Community engagement including community engagement initiatives, apprenticeships, charitable giving and volunteering.

Environmental impact – The majority of our businesses have low carbon footprints and minimal impact on the environment. We still encourage them to consider how they can improve their energy use and waste management, as well as reduce business travel.

Positive relationships with key external stakeholders including customers and suppliers: for example, by responsible pricing and sales and supplier relationships.

Transparency of company commitments and progress, including external reporting and sustainability communications.


Responsible investing case studies – Employee engagement The types of business we invest in are people-centric: they do not operate heavy equipment or run substantial manufacturing sites. The employees are therefore the most important asset across our businesses. Numerous studies show that there is a correlation between employee satisfaction and productivity, profitability and customer loyalty, and that an engaged workforce contributes to a safer, more efficient workplace with lower staff turnover.

Many of our portfolio companies are demonstrating best practice in building an engaged and diverse workforce; here are a few examples:

Citation provides professional regulatory-driven compliance services to nearly 20,000 clients across a range of specialist areas, including: human resources and employment law; health and safety; ISO accreditation; and staff training. The Company is headquartered in Cheshire and employs over 400 professionals. Citation has been listed in the Sunday Times’ UK Top 100 Best Companies to Work for three consecutive years.

Citation is known to be one of Hg’s best performing businesses when it comes to employee engagement and satisfaction. Employee engagement is at the heart of the company’s dynamic people strategy:

• Valuing its people and showing appreciation: in addition to a flexible and comprehensive benefits package, more unusual perks include: a day off on your birthday; a paid week of leave when you get married; and an extra day off for new grandparents. Staff can nominate one another for annual awards, and long service awards celebrate those who have been part of the team for more than five years.

• Creating a fun, friendly and supportive atmosphere: from virtual ‘thankyous’ which can be sent to anyone, to social get-togethers, Citation makes fun, friendliness and teamwork a core part of its culture.

• Putting an emphasis on communication: Chris Morris, CEO, does a monthly business briefing for all staff which is available to colleagues in the field and those on leave. It is a forum for all colleagues to pose questions or share updates, and particularly valuable for keeping those not based at head office in touch with what’s going on.

• Based on feedback from colleagues, Citation recently launched a new concept of ‘Bitesize’ learning sessions, to increase knowledge sharing across different areas in the business and increase exposure to the leadership team. The fun and interactive sessions are approximately 30 minutes long and led by Citation colleagues. In 2017, they covered topics such as ‘the future’ with Citation’s CEO, events planning, impactful writing and keeping your loved ones safe and healthy.

• In 2017, Citation initiated a Culture Club to help nurture and protect the company’s culture and define the few core values that matter most to employees. The entire firm was involved, and everyone had a say, as the new values “do the right thing”, “take ownership and deliver”, “fresh thinking” and “the human touch” were defined.

Citation firmly believes that employee engagement improves customer service. Achieving national recognition has also boosted its ability to attract talent, with responses to recruitment posts soaring.




Kinapse is a global provider of expert advisory, capability building and operational services to the world’s leading Life Sciences organisations, throughout the drug development life cycle. Its services range across a number of areas including research and development, clinical operations, regulatory services, safety and pharmacovigilance, medical affairs and market access. The Group has offices in the UK, India and the United States and employs over 700 professionals worldwide.

Building a talented, expert, high performing workforce is absolutely key for Kinapse to retain and grow its existing business and win new clients. Kinapse hires thoughtfully and inclusively and places a big emphasis on diversity. With a company culture underpinned by its strong values system, employees are encouraged to be themselves, to perform at their best, and are supported to reach their full potential through development, training and challenging work programmes.

In 2017, Kinapse introduced an enhanced employee engagement programme called Kinapse Employee Engagement Programme, KEEP, which includes a number of initiatives:

• KEEP Learning – A learning and development programme with masterclasses by senior leaders in the organisation on topics such as public speaking and leadership. Individual opportunities for growth are also available through Kinapse’s Mentoring Programme and Chairman’s Scholarship for Training Award.

• KEEP Listening – Monthly sessions open to everyone, providing an opportunity to spend time with senior management, sharing ideas, suggestions and general feedback. Open, two-way communication is encouraged from top to bottom and if it is a confidential ear that is needed, the KEEP email box is manned by the Head of Talent Management who is there to offer advice, support and encouragement when needed.

• KEEP Giving – A charity and volunteer initiative, driven by champions across various locations, focusing on fund- raising initiatives and giving back to local communities. The K-Day programme encourages employees to spend one work day a year (gifted from Kinapse) supporting a cause close to their heart, either as a volunteer or fund-raiser. Employees’ health and wellbeing is also supported and encouraged beyond the workplace with a free eye test campaign, talks from local fitness centres and regular sports socials.

Kinapse believes an engaged workforce is vital to the success and growth of the business and everything it does is underpinned by its values, lived and breathed by the team on a daily basis.

challenge

Enjoying a

for better

Striving

Our values

others

Helping

learning

Always

respect

Showing

open

Being

Net asset value (NAV)

During the year, the NAV of the Company increased by £105.2 million, from £615.8 million to £721.0 million at 31 December 2017.

There were a number of underlying factors contributing to the increase in the NAV. Positive impacts were the £125.5 million revaluation of the unquoted portfolio and uplifts of £41.7 million on the realisation of investments compared with their carrying value at the start of the year.

Reductions in the NAV included: the payment of £23.1 million of dividends to shareholders and Hg’s remuneration (£7.8 million and a £26.6 million increase in the provision for future carried interest).

Revenue£’000

Capital£’000

Total£’000

Opening NAV as at 1 January 2017 37,156 578,600 615,756

Realised capital and income proceeds from investments in excess of 31 December 2016 book value 4,086

37,591

41,677

Net unrealised capital and income appreciation of investments 23,991 101,550

125,541

Net realised and unrealised gains from liquid resources 1,182 (381) 801

Dividend paid (23,141) – (23,141)

Expenditure (2,834) (2,393) (5,227)

Taxation (43) – (43)

Investment management costs:

Priority profit share - current year charge (7,711) – (7,711)

Priority profit share - net loan allocation 1,372 (1,372) –

Carried interest - current year provision – (26,629) (26,629)

Closing NAV as at 31 December 2017 34,058 686,966 721,024

900,000

800,000

700,000

100,000

200,000

300,000

400,000

500,000

600,000

–

£’00

0

615,756

721,024

41,677

125,541 801 (23,141) (5,270) (7,711)

December2016NAV

December2017NAV

Realisedgain

Unrealisedgain

Return on liquid

resources

Dividendpaid

Expenditureand

taxa�on

Priority profit share to General

Partner

Carriedinterest provision

(26,629)


Attribution analysis of movements in NAV

Overview of the year

Analysis of NAV movements

Realised and unrealised movements in the value of investments

£’million

(10) (5) 5 10 15 20 25 30 35 40–

Visma (1)IRIS (2) Sovos Compliance (3)Sequel Business Solu�ons (sold)Zenith (sold)QUNDIS (sold)Ullink (sold)Other Mercury investmentsCogitalGroup (5)Teufel (19)Parts Alliance (sold)JLA (4)A-Plan (7)Foundry (10)Renewable energyZitcom (sold)Allocate So�ware (14)Raet (8)Atlas (27)TeamSystem (16)Trace One (17)Hg6E Kinapse (24)Frösunda (31)Radius (12)

36.519.4

14.212.5

10.99.79.5

8.97.5

6.66.5

5.75.15.1

4.84.5

4.03.43.23.02.92.9

(3.9) (7.4)

(8.3)

Investment name and ranking by value at 31 December 2017

Current investments Exited investments

During the year, the value of the unrealised investments increased by £16.5 million, before the provision for carried interest. The majority of the increase (£160.2 million) relates to increases from profit growth in the underlying investments and £46.0 million from increased ratings.

These were partially offset by £109.1 million of decreases driven by realisations at carrying value net of acquisitions and an increase in net debt of £82.8 million resulting from refinancings that returned cash to the Company and further M&A activity within the portfolio.

Attribution analysis of movements in the value of investments1

800,000

300,000

0

100,000

200,000

400,000

500,000

600,000

700,000628,523 644,994(4,572) 6,744

160,19245,977 (82,799)

73,021

December2016

poroliovalua�on2

December 2017

poroliovalua�on2

Forexmovements

Other(eg Hg 6E,

RPP1,RPP2)

Trading Ra�ngs Increase innet debt

Acquisi�ons Realisa�onsat carrying

value

(182,092)

£’00

0

1 Including accrued income and excluding carried interest provision 2 Before the deduction of the carried interest provision


Overview of the year continued

The top 20 buyout investments (representing 83% of total investments by value) have delivered strong sales growth of 14% and EBITDA growth of 16% over the last twelve months (‘LTM’).

This demonstrates consistent robust growth with revenues and EBITDA growing on average by 12% p.a. and 16% p.a. respectively over the last three years. The business model characteristics of these companies give us confidence that this double-digit growth can be achieved consistently going forward.

More than 70% of the businesses we own are seeing double-digit revenue growth, and more than 80% of the portfolio has delivered double-digit EBITDA growth over the last twelve months.

Profits have grown at a faster rate than revenues. Investment made over the last few years into the cost base

of a number of our companies, for example, to finance increased sales and marketing capabilities, strengthen management and new product development, continues to bear fruit.

We continue to see very robust and consistent double-digit trading performance from Visma, IRIS, Sovos Compliance, Foundry, Allocate Software and Intelliflo in the technology sector, and CogitalGroup and JLA in the Services sector.

Whilst new to the portfolio, Esendex has seen a good start to its life with Hg. Over 2017, we have taken the decision to write down one of our top twenty investments, Radius, and in addition, Frösunda and Kinapse whose operational performance has been below expectations over the year.

Overall, continued strong earnings growth and cash generation continue to drive equity value in our investments.

Top 20 portfolio trading performance as at 31 December 2017

Top 20 LTM profit growth: +16%

250

200

150

100

50

–

£’million

500

450

400

350

300

Growth rates<0% p.a. 0% to <10% p.a. 10% to <20% p.a. >20% p.a.

2% 14% 56% 28%

1 4 6 9

LTM EBITDA % of top 20 by value within associated bandNumber of investments within associated band

800

600

400

200

–

£’million

1,400

1,200

1,000

Growth ratesLTM Sales

<0% p.a. 0% to <10% p.a. 10% to <20% p.a. >20% p.a.

% of top 20 by value within associated bandNumber of investments within associated band

5% 23% 48% 24%

2 7 7 4

Top 20 LTM sales growth: +14%



Our valuation policy is applied consistently, in accordance with the IPEV Valuation Guidelines. Each company has been valued individually, based on the trading multiples of comparable businesses; this resulted in an average EBITDA multiple for the top 20 buyout investments of 16.4x (14.2x at 31 December 2016 and 16.0x at 30 June 2017).

There remains a continued shift in the mix of the portfolio to higher growth businesses, in particular in the technology sector, where we hold a number of companies with substantial opportunities to grow their SaaS business. Seven of the top 20 companies (representing 62% by value) are valued at a multiple of over 16x (Mitratech, Visma, TeamSystem, IRIS, Sovos Compliance, Ullink and Allocate). All have attractive business models, are growing strongly and generating cash, and are in demand from investors. As we noted earlier, we have increased our exposure to Visma and Sovos Compliance during the year.

We continue to take a considered and prudent approach

in determining the level of maintainable earnings to use in each valuation. Most holdings have been valued using the LTM earnings to 30 November 2017, unless we have anticipated that the outlook for the full current financial year is likely to be lower, in which case we have used forecast earnings. In selecting an appropriate multiple to apply to a company’s earnings, we look at a basket of comparable companies, primarily from the quoted sector, but where relevant and recent, we will also use M&A data.

Our companies make appropriate use of gearing, with an average net debt for the top 20 of 5.4x LTM EBITDA. Many of our businesses have highly predictable, strong earnings growth and are very cash generative, enabling us to use debt to leverage our returns. Over 2017 we took the opportunity to refinance Visma, A-Plan, Ullink and IRIS as detailed on page 43.

2017 saw significant increases in valuations. These were primarily driven by strong trading performance in the underlying businesses.

Valuation and gearing analysis as at 31 December 2017

Top 201 EV to EBITDA valuation multiple: 16.4x

250

200

150

100

50

–

£’million

300

EV to EBITDA bands<12.0x 12.0x to <14.0x 14.0x to <16.0x 16.0x to <18.0x >18.0x

EBITDA % of top 20 by value within associated bandNumber of investments within associated band

7% 23% 8% 39%

3 5 3 5

23%

2

Top 20 net debt to EBITDA ratio: 5.4x

1,400

1,300

1,000

800

600

400

400

–

£’million

1,600

Debt to EBITDA bands<3.0x 3.0x to <5.0x 5.0x to <6.0x 6.0x to <7.0x >7.0x

Debt % of top 20 by value within associated bandNumber of investments within associated band

16% 32% 19% 11%

6 5 2 3

22%

4

1 Excluding two investments valued on a basis other than earnings.



Outstanding commitments of the Company 2017 ended with liquid resources of £160 million, supported by an undrawn bank facility of £80 million. Outstanding commitments as at 31 December 2017 were £449 million, as listed below. We anticipate that the majority of these outstanding commitments will be drawn down progressively over the next four to five years and are likely to be partly financed by future cash flows from realisations. Additionally, to mitigate the risk of being unable to fund any draw-down under its commitments to invest alongside certain of Hg’s funds, the Board has negotiated a right to opt out, without penalty, of the Company’s obligation to fund such commitments where it does not have the funds to do so or certain other conditions exist.

Fund Fundvintage

Originalcommitment

Outstanding commitments as at 31 December 2017

Outstanding commitments as at 31 December 2016

£’million £’million % of NAV £’million % of NAV

Hg 8 2017 350.0 341.1 47.3% 350.0 56.9%Hg Mercury 2 2017 80.0 73.3 10.2% – –Hg 7 2013 200.0 – – 39.8 6.5%Hg Mercury 2011 60.0 6.2 0.9% 10.3 1.7%Asper RPP II 2010 35.51 8.3 1.1% 7.5 1.2%Hg 6 2009 285.0 17.2 2.4% 11.0 1.8%Hg 6E3 2009 15.0 0.9 0.1% 0.6 0.1%Pre-Hg 6 vintage pre-2009 120.02 1.3 0.2% 1.3 0.2%Asper RPP I 2006 19.24 0.8 0.1% 0.8 0.1%

Total 449.1 62.3% 421.3 68.5%

Liquid resources 160.3 22.2% 45.8 7.4%

Net outstanding commitments unfunded by liquid resources 288.8 40.1% 375.5 61.1%

1 Sterling equivalent of €40.0 million. 2 Excluding any co-investment participations made through HGT LP.

3 Partnership interest acquired during 2011. 4 Sterling equivalent of €21.6 million.



£414.4 million Hg 8 and Hg Mercury 2

commitment. The Company’s commitment

to invest alongside these funds will be

drawn down over the next four to five years.

£34.7 million Investment period completed; remaining funds retained for follow-on investment.

£449mTotal outstanding

commitments

Analysis by value* of investment return relative to its original cost 91% Above 9% Below

Sector by value* of primary buyout portfolio 61% Technology 31% Services 6% Industrial technology 2% Healthcare

Net assets by class 93% Unquoted 7% Cash & other assets

Geographic spread by value* of primary buyout portfolio 54% UK 19% Nordic Region 11% Other Europe 9% Germany 7% USA

Investment vintage by value* of primary buyout portfolio 21% 2016 9% 2015 22% 2014 16% 2013 8% 2012 24% pre 2012

Deal type by value1 97% Buyout 3% Renewable Energy



















Investment portfolio of the Company


*Excluding carried interest provision

76% Technology 20% Services

3% Industrial technology

1% Healthcare

6% 2017

9% 2015

29% 2016

34% pre 2014

22% 2014

47% UK 15% North America

13% Other Europe

17% Scandinavia

8% Germany

13% Below87% Above

Fund limited partnerships Residual cost£’000

Total valuation1

£’000Value

%

Primary buyout funds:1 HGT 7 LP 170,780 261,941 46.6%

HGT 7 LP - Provision for carried interest – (20,584) (3.7%)

2 HGT 6 LP 90,960 165,927 29.5%HGT 6 LP - Provision for carried interest – (49,681) (8.8%)

3 HGT LP 73,692 111,748 20.0%4 Hg Mercury D LP 35,152 66,262 11.8%

Hg Mercury D LP - Provision for carried interest – (10,058) (1.8%)

5 HGT 8 LP 6,720 6,909 1.2%6 HGT Mercury 2 LP 6,302 6,585 1.2%

Total primary buyout funds 383,606 539,049 96.0%

Secondary buyout fund interests:5 Hg 6 E LP – 8,119 1.4%

Hg 6 E LP - Provision for carried interest – (2,588) (0.5%)

Total secondary buyout fund interests – 5,531 0.9%

Total buyout funds 383,606 544,580 96.9%

Renewable energy funds:6 Asper RPP II LP 19,160 16,709 3.0%7 Asper RPP I LP 4,861 794 0.1%

Total renewable energy funds 24,021 17,503 3.1%

Total investments net of carried interest provision 407,627 562,083 100.0%

Sector by value* of our primary buyouts

Investment vintage by value* of our primary buyouts

Geographic spread by value* of our primary buyouts

Analysis by value* of investment return relative to its original cost

1 Includes accrued income.

The Company's investments

Representing aggregate realised proceeds and unrealised valuations of an investment

The vast majority of our investments are generated by establishing and developing relationships with companies in our chosen segments over the longer term and typically pursuing opportunities where we have a strong relationship with a founder or management team. By doing this, we believe that we can invest in the very best businesses within our chosen sub-sectors and clusters.

We continue to look for businesses that share similar underlying business model characteristics such as: high levels of recurring revenues; a product or service that is business critical but typically low spend; low customer concentration; and low sensitivity to market cycles. This is a theme that runs through many of our new investments and we believe companies with these characteristics will remain in high demand.

Over 2017, the Company has invested £11.5 million (Mitratech and Esendex) by way of co-investment, in addition to its commitment to invest alongside Hg 7 and Hg Mercury 1. This is an attractive way to invest more funds, when available, with no fees or carried interest being payable.

Over the course of the year, Hg has invested a total of £764 million on behalf of its clients, with the Company’s share being £73 million.

Gentrack – Gentrack is a publicly listed developer of specialist software for energy utilities, water utilities and airports around the world. The investment in Gentrack helped finance the acquisition of Junifer Systems, a leading provider of utilities software in the UK. The combined product offering of Gentrack and Junifer is well positioned for growth, capitalising on the growing market share of independent energy retailers, the UK smart metering roll-out, and retail competition in water for commercial and industrial consumers. Gentrack also intends to take Junifer’s product offering into other geographic markets as a solution for new entrants and SME retailers.

fundinfo – fundinfo is a leading technology platform for fund data and documents publication and dissemination to the global fund management industry (including banks, insurance companies, financial advisors, family offices and platforms), headquartered in Zurich, Switzerland.fundinfo will join Hg’s current network of European headquartered FinTech investments, including Intelliflo (SaaS financial advisor software), Ullink (connectivity and trading software) and the recently exited Sequel (insurance software and analytics).


Investments and realisations

Investments 2017

Mitratech – Mitratech is a leading global provider of legal, risk and compliance software serving multinationals and SMEs across Europe and the US.This investment by the Technology team follows many years of experience in the regulatory-driven business software space. Mitratech demonstrates many of the business model characteristics that Hg looks for, including: a business-critical product; a high proportion of repeatable revenues; strong customer loyalty; an opportunity for M&A; and a strong management team with a proven track record in both organic and M&A-led growth.

New investments

DADA – In October, the Mercury team agreed to acquire a majority stake in DADA, a leading provider of hosting services to SMEs in Italy and the UK as well as other European geographies. This was acquired as part of a public-to-private transaction from the Italian Stock Exchange and represents the first investment from the Mercury 2 fund. The investment in DADA is another example of the Mercury team’s approach to investing in technology infrastructure businesses.

Further details on investments as at 31 December 2017 can be found on pages 48 to 70.

MeinAuto.de – In December, Hg’s Munich team led an investment in MeinAuto.de (‘MeinAuto’), a leading B2C online platform for new car purchases based in Germany. This investment is the first step in an initiative by Hg to develop a new integrated and technology enabled service provider in the automotive distribution & financing space and is the result of considerable sector work undertaken by Hg in recent years in the automotive services and software spaces with historical investments including Zenith and Epyx.

Visma – In June, Hg announced a further investment in Visma, a leading provider of mission-critical business software to SMEs in the Nordic region, following a decision by KKR to sell its holding in the group. Hg is the lead investor in the new transaction structure which valued the business at NOK 45 billion (£4.2 billion), the largest ever software buyout in Europe. In 2002, Hg’s Technology team identified regulatory-driven, subscription-based software as an attractive sub-sector with scope for considerable growth over the following decade and initially invested in Visma in 2006. Hg has made more than twelve investments in this space over the last fifteen years and more than 150 bolt-on acquisitions over this same period. In total, Hg has made 37 software TMT investments and over 200 bolt-on software acquisitions since 2002, making the firm comfortably the most active European TMT investor over this period.


Investments and realisations continued

Sovos Compliance – In November, Hg’s Technology team made a further investment in Sovos Compliance by acquiring the minority stake held by Vista.Sovos Compliance is a global provider of compliance software solutions. The company has performed well since Hg’s initial investment in March 2016, with strong organic growth in both revenue and EBITDA.

Esendex – Esendex is a leading provider of mission-critical business messaging services across Europe and represents a further investment into the Technology Infrastructure cluster. On completion of the transaction Esendex was merged with an existing Mercury portfolio company, Mobyt, which provides similar business messaging solutions in Italy and France. Esendex demonstrates many of the business model characteristics that Hg looks for, including: a high proportion of recurring revenues from serving a large fragmented base of SMEs, delivering an operationally critical service and the opportunity to back a strong management team.

Further investments

DADA – Following the initial acquisition made in October 2017 (see previous page), Hg announced in February 2018 that it had successfully completed a tender offer for the remaining ordinary shares and would complete a public-to-private transaction of DADA from the Italian Stock Exchange. The Company will have invested a total of approximately £7.1 million in DADA, with other institutional clients of Hg investing alongside the Company through the Mercury 2 Fund.

Further investment since the year-end

Over the course of the year, Hg has returned a total of £1.5 billion to its clients, including £224 million to the Company.

It was a very active period for realisations. We have made several references to ‘frothy’ markets over the past year and this has helped inform our approach to selling investments, whilst also carefully considering our appetite for selling versus the benefits of remaining invested in selected businesses for longer.

We have also taken advantage of buoyant debt markets during the period by refinancing investments where we have good visibility of their future earnings, returning cash proceeds to our clients, including the Company, and we will continue to assess further opportunities here.

Zitcom – In June 2017, the Technology team completed the sale of Zitcom, a Danish hosting and cloud solutions provider operating in the SME segment, to Intelligent, a Belgian headquartered provider of hosting services. This transaction delivered a 3.3x investment multiple and a 141% gross IRR over the investment period. The sale of Zitcom resulted in an uplift of 105% over the carrying value of the investment at 31 December 2016.

Valueworks – In July, we completed the sale of Valueworks, a provider of a private SaaS platform for procurement and contract management in the social housing sector, to Inprova, a provider of procurement services for social housing. This was for a nominal sum and will not generate any proceeds to the Company.

QUNDIS – In May 2017, the Munich team completed the sale of QUNDIS, a leading provider of sub-metering solutions in Europe, to a German investment group, KALORIMETA, a leading service provider of climate-intelligent solutions in the buildings sector, for a total enterprise value of c. €400 million. This transaction delivered a 3.5x investment multiple and a c. 29% gross IRR over the investment period, with Hg retaining a minority position in the combined group. The sale of QUNDIS resulted in an uplift of 29% over the carrying value of the investment at 31 December 2016. A case study of this investment appears on pages 28 and 29.

Parts Alliance – In June, Hg announced that it had agreed the sale of Parts Alliance, a UK automotive aftermarket parts distributor, to Uni-Select Inc., a listed Canadian distributor of automotive refinish and industrial paint products and aftermarket parts. The transaction had a value of £205 million, and delivered a 2.0x investment multiple and a 19% gross IRR over the investment period. The sale of Parts Alliance resulted in an uplift of 46% over the carrying value of the investment at 31 December 2016.

e‑conomic – In June, we announced that the Technology team had agreed the sale of the Hg 6 vintage investment in e‑conomic to Montagu and ICG, realising additional proceeds of £220 million to clients, including £33 million to the Company. The sale of e‑conomic resulted in an uplift of 33% over the carrying value of the investment at 31 December 2016, delivering an overall return of 2.7x cost and a 29% gross IRR.



Realisations 2017

Zenith – In March 2017, we completed the sale of Zenith, the largest independent vehicle leasing business in the UK, to Bridgepoint in a transaction totalling £750 million. This transaction delivered a 2.9x investment multiple and a 46% gross IRR over the investment period. The sale of Zenith resulted in an uplift of 23% over the carrying value of the investment at 31 December 2016.

Exits

Further detail on investments as at 31 December 2017 can be found on pages 48 to 70.

Mainio Vire – In June 2016, we announced the sale of Mainio Vire, a provider of elderly care, mental health and home services in Finland, to Mehiläinen, a private provider of social and health care services, also based in Finland. Hg retained a small residual stake in this company which was sold in August 2017, returning a further £3.8 million to the Company.

Sequel Business Solutions – In August, we completed the sale of Sequel Business Solutions (‘Sequel’), a provider of software and services to the Lloyd’s of London and the broader insurance markets, to Verisk Analytics (Nasdaq: VRSK), a leading data analytics provider serving customers in property/casualty insurance, natural resources, and financial services, headquartered in the USA. This transaction delivered a 5.1x investment multiple and a 77% gross IRR over the investment period. The sale of Sequel resulted in an uplift of 161% over the carrying value of the investment at 31 December 2016. A case study of this investment appears on pages 26 and 27.


Ullink – In May 2017, the Technology team completed the refinancing of Ullink, a global provider of electronic trading applications and connectivity to the financial community. On completion, this returned £43.8 million to Hg clients, including £4.3 million to the Company, representing a 43% return on the original investment made in 2014.

A‑Plan – In March 2017, the Services team completed the refinancing of A-Plan, a UK based distributor of motor and household insurance policies to SMEs and individuals. This returned £52.3 million to Hg clients, including £5.2 million to the Company, representing a 35% return on the original investment made in 2015.

IRIS – In October, the refinancing of IRIS, a provider of business-critical software and services to SMEs in the UK, was completed. This returned £50 million to Hg clients, including £7.5 million to the Company. Since 2011, IRIS has returned 57% on the original investment made.

Visma – In April 2017, the Technology team completed the refinancing of Visma, a leading provider of mission-critical software to SMEs in Scandinavia, returning proceeds of £94 million to Hg clients, including £9.2 million to the Company.


Refinancings

Ullink – In November 2017, the Technology team announced that it had received a definitive binding offer from Itiviti, a company backed by Nordic Capital, to acquire Ullink, a leading global provider of electronic trading and connectivity solutions to the financial community. This proposed sale is subject to French workers’ council consultations, and customary approvals, such as regulatory clearances. The sale of Ullink is expected to return £24 million to the Company, delivering a 3.0x investment multiple and a 35% gross IRR over the period.

Realisation since the year‑end

JLA – In January, the Services team completed the refinancing of JLA, a provider of laundry and catering services, returning £25 million to Hg clients, including £3.8 million to the Company. JLA has now returned 211% on the original investment made in March 2010.

Refinancing since the year‑end

Realisations made during the year

2 Includes gross revenue received during the year-ended 31 December 2017.

Company Sector Exit route Proceeds2

£’000

Zenith Services Secondary sale 59,090 QUNDIS Industrial technology Trade sale 37,302 e-conomic Technology Secondary sale 36,647Parts Alliance Services Trade sale 21,142Sequel Business Solutions Technology Trade sale 20,247Zitcom Technology Trade sale 8,818Mainio Vire Healthcare Trade sale 3,775

Full realisations 187,021

Visma Technology Refinancing 9,156Hg 6 E LP Fund Distribution received 8,862 A-Plan Services Refinancing 5,150Asper RPP II LP Renewable energy Distribution received 4,899Ullink Technology Refinancing 4,317 IRIS Technology Refinancing 3,039Other 1,390

Partial realisations 36,813

Total proceeds from realisations received by the Company 223,834

1 Figure is negative due to a refinancing which is accounted for as a reduction of original cost if completed within 12 months of original acquisition.

Investments made during the year

Company Sector Geography Activity Cost£’000

Mitratech Technology North America Global provider of legal, risk and compliance software 22,258 MeinAuto.de Services Germany B2C online platform for new car purchases 6,720DADA Technology Italy Domain hosting and digital services 6,302fundinfo Technology Switzerland Technology platform for fund data and documentation 3,117 Gentrack Technology New Zealand Developer of software for utilities and airports 2,069

New investments 40,466

Sovos Compliance Technology North America Tax compliance software solutions 14,224Visma Technology Scandinavia Provider of business software to SMEs 13,229

Esendex Technology UK Provider of business messaging services across Europe 7,635

Other 1,922IRIS Technology UK Software and services to the UK accountancy market (4,455)1

Further investments 32,555

Total investments on behalf of the Company 73,021


Summary of investment and realisation activity


2017 has been a successful year for Hg in many ways but particularly in terms of a combined focus on driving and crystallising value across our network of portfolio companies.

This has been primarily underpinned by strong trading across the unrealised portfolio, alongside a series of realisations throughout the year completed at attractive valuations, especially relative to prior book value. In terms of our outlook for 2018, we expect the velocity of Hg realisations to continue at a broadly similar pace, with a number of exit processes already underway.

Over the year, and very consciously given current market conditions, Hg has focused on being a material net seller; realising in cash almost double the amount invested over the previous 12 months. This has generated c.£1.5 billion to our clients, including £224 million to the Company, from seven exits and four refinancings. The largest of these was in relation to the sale of Zenith, announced in January, and QUNDIS, which completed in May. Strong performance over the period has continued to demonstrate the attractiveness of Hg portfolio companies to both trade and financial buyers, as evidenced by the recent sale of Ullink, announced in November 2017, at a multiple of 3.0x original cost and a gross IRR of 35%. We anticipate returning further capital over the next six to 12 months.

Trading during 2017 has continued to generate double-digit revenue and EBITDA growth across the businesses we own. Given their defensive characteristics and our focus on protected business models, we believe our investments are well positioned to see strong growth on an absolute and relative basis going forward, even if macro-economic conditions deteriorate over the coming months. This is reinforced by our historic performance during the financial crisis post-Lehman, when our businesses continued to grow both revenues and EBITDA in aggregate throughout the period from 2008 to 2010, without a down year.

Despite the focus on realisations, Hg has continued to invest selectively over the last 12 months, capitalising on situations where we have a unique angle and have built many years of knowledge of the business, and typically building on a strong relationship with a founder or management team. Despite the heat of the current market, we do continue to see exciting and attractive investment opportunities in our target geographies and sub-sectors, just as we did in the closing stages of the last upwards cycle in 2005 to 2008. This led to five new investments over the course of 2017: Mitratech, a global provider of regulatory tax compliance software; fundinfo, a technology platform

for fund data and documentation; Gentrack, a publicly listed global developer of specialist software for energy utilities, water utilities and airports; DADA, a provider of hosting services in Italy and, most recently, MeinAuto, a leading B2C online platform for new car purchases based in Germany. In addition to these new investments, significant further capital was deployed into three businesses we know well: Visma, Sovos Compliance and Esendex.

In this type of market environment, we believe that the clarity of our investment strategy continues to confer a number of clear advantages to a disciplined buyer. Specifically, we will continue to focus on investing in businesses that provide a business-critical product or service, to a fragmented customer base, and which benefit from strong contracted or recurring revenues. This should enable us to identify opportunities with the appropriate business model to generate strong, risk-adjusted returns for our clients. With the addition of the Saturn Funds and Transition Capital, we are able to maintain the clarity of our investment strategy as described, while broadening our opportunity set of potential investments and adding to the scale and reach of our network within European technology.

During 2017, we have continued to consider the UK’s forthcoming exit from the European Union and our prognosis remains that this will have a relatively limited impact on our investments, especially given the characteristics of our businesses, their geographic profile and their relatively protected nature. Hg’s pan-European presence and office in Germany (since 1999) also offers flexibility in terms of the breadth of our investment focus and general approach. More broadly, the post referendum environment has seen a general unwinding of historic currency losses on non-sterling investments across our funds, slightly benefiting valuations over the year. We have now realised nine portfolio companies since the Brexit vote at the end of June 2016, six of which were based in the UK.

Finally, our focus on specific operational improvements in these areas of investment focus, aligned with the efforts of our dedicated and large internal ‘OI’ team, also means that we believe we can continue to generate meaningful long-term value in a number of particular areas across the portfolio on a repeatable basis, irrespective of the challenges of the broader macro-environment. From pricing analysis and customer satisfaction to cyber security, these portfolio related initiatives will continue to remain an area of real focus going forward.

Strong trading from the portfolio, combined with capital returns from exits above book value, continue to drive value for our investors.

Steven Batchelor, COO & Partner, Hg


Outlook


1 Investment through HGT 7 LP and co-investment participation through HGT LP.2 Investment and co-investment participation through HGT LP.3 Investment through HgCapital Mercury D LP and co-investment participation through HGT LP.4 Including accrued income but before the provision for carried interest of £82,911,000.

Vintage Sector LocationYear of

investmentResidual

cost£’000

Totalvaluation

£’000

4 Value

%

Cum. value

%

1 Visma1 HGT 7/HGT Technology Scandinavia 2014 45,365 97,009 15.0% 15.0%2 IRIS HGT 6 Technology UK 2011 21,654 76,526 11.9% 26.9%3 Sovos Compliance1 HGT 7/HGT Technology N. America 2016 38,508 71,694 11.1% 38.0%4 JLA HGT 6 Services UK 2010 3,511 30,272 4.7% 42.7%5 CogitalGroup1 HGT 7/HGT Services UK 2016 20,966 29,049 4.5% 47.2%6 Ullink (sold) HGT 7 Technology France 2014 7,393 24,302 3.8% 51.0%7 A-Plan HGT 7 Services UK 2015 10,447 22,451 3.5% 54.5%8 Raet HGT 7 Technology Netherlands 2016 16,127 20,427 3.2% 57.7%9 Achilles2 HGT Technology UK 2008 15,218 20,150 3.1% 60.8%10 Foundry HGT 7 Technology UK 2015 15,142 19,739 3.1% 63.9%11 Mitratech1 HGT 7/HGT Technology N. America 2017 22,258 19,564 3.0% 66.9%12 Radius HGT 6 Services UK 2013 18,686 16,466 2.6% 69.5%13 Esendex3 Mercury/HGT Technology UK 2016 11,791 13,595 2.1% 71.6%14 Allocate Software Mercury Technology UK 2014 4,094 13,553 2.1% 73.7%15 Citation HGT 7 Services UK 2016 10,892 11,137 1.7% 75.4%16 TeamSystem HGT 6 Technology Italy 2010 144 10,702 1.7% 77.1%17 Trace One Mercury Technology France 2016 4,489 10,370 1.6% 78.7%18 Intelliflo Mercury Technology UK 2013 3,978 10,124 1.6% 80.3%19 Teufel HGT 6 Industrial technology Germany 2010 11,144 9,860 1.5% 81.8%20 Lumesse HGT 6 Technology UK 2010 20,602 9,591 1.5% 83.3%21 STP Mercury Technology Germany 2016 5,422 8,473 1.3% 84.6%22 P&I1 HGT 7/HGT Technology Germany 2013 1,796 7,936 1.2% 85.8%23 Eucon Mercury Technology Germany 2015 4,408 7,930 1.2% 87.0%24 Kinapse HGT 7 Services UK 2016 11,131 7,121 1.1% 88.1%25 MeinAuto HGT 8 Services Germany 2017 6,720 6,909 1.1% 89.2%26 DADA Mercury 2 Technology Italy 2017 6,302 6,585 1.0% 90.2%27 Atlas HGT Services UK 2007 12,542 6,406 1.0% 91.2%28 QUNDIS HGT 6 Industrial technology Germany 2012 922 6,319 1.0% 92.2%29 EidosMedia HGT 7 Technology Italy 2015 8,414 5,323 0.8% 93.0%30 Evaluate Mercury Technology UK 2016 3,733 4,912 0.8% 93.8%31 Frösunda HGT 6 Healthcare Scandinavia 2010 14,296 3,991 0.6% 94.4%32 fundinfo Mercury Technology Switzerland 2017 2,700 3,486 0.5% 94.9%33 Gentrack HGT 7 Technology New Zealand 2017 2,069 3,335 0.5% 95.4%34 e-conomic HGT 6 Technology Scandinavia 2013 – 997 0.2% 95.6%

Non-active investments (4) 743 318 – 95.6%

Total buyout investments (38) 383,607 616,622 95.6%

Currency hedges HGT 7/HGT 6/HGT Forward sale of US$ and € – 2,750 0.4% 96.0%Secondary fund interests Hg 6E Secondary fund interests – 8,119 1.3% 97.3%Renewable energy Asper RPP I / II Renewable energy 24,020 17,503 2.7% 100.0%

Total all investments 407,627 644,994 100.0%

Investments (in order of value)

OverviewOverview of the underlying investmentsheld through the Company’s limited partnerships

Buyout investments are held through limited partnerships, of which the Company is the sole limited partner. The Company invests alongside other clients of Hg. Typically, the Company’s holding forms part of a much larger majority interest held by Hg’s clients in buyout investments in companies with an enterprise value (‘EV’) of more than £30 million. Hg’s Review generally refers to each transaction in its entirety, apart from the tables detailing the Company’s participation or where it specifically says otherwise.


Top 20 buyout investmentsrepresenting 83% of the value of the Company’s investments

Why did we invest?Visma was an early example of Hg’s focus on recurring revenue, business critical application software companies serving SMEs and their advisers. The company enjoys high levels of predictable, recurring revenue resulting from a subscription payment model. When Hg first invested, in 2006, both organic and acquisition driven revenue growth opportunities were identified, as well as significant opportunities to increase profit margins.

How do we intend to create value?Visma has consistently exceeded our investment plans. In April 2014, following a decision by majority owner KKR to sell part of its original 2010 stake in Visma, Hg decided to sell its remaining stake, generating a total return between 2006 and 2014 of 5.2x original cost and a gross IRR of 33%. Hg clients then reinvested £409 million in the business for a 31% stake, via the Hg 7 fund and co-investment, as a co-lead investor, alongside KKR and Cinven. This valued the business at a total EV of NOK 21 billion (£2.1 billion). In 2017 Hg announced a further investment into Visma following the sale of KKR’s stake valuing the business at NOK 45 billion (£4.2 billion) The continued reinvestment in Visma reflects our conviction in the continuing strength of the business, backing a management team we know well with a strong track record of creating value for investors.

What has been achieved?Since our first investment in 2006, Visma has acquired over 130 companies, notably: Mamut ASA, a provider of ERP software to small customers in Norway (2011); Netvisor, a provider of SaaS based ERP software to the Finnish small customer segment (2011); Agda, a Swedish provider of payroll software to SMEs (2012); InExchange, a Swedish e invoicing leader (2013); Huldt & Lillevick, a payroll provider to SMEs (2014); e-conomic / SpeedLedger (2015); TripleTex, a Norwegian SaaS micro ERP player; EasyCruit, recruitment software solutions (2016); Bluegarden, a payroll provider in Denmark and Scandinavia (2017); and Admincontrol, a fast-growing SaaS company offering board portal solutions (2017). These deals strengthened organic growth from innovation in new products, as well as driving margin improvement through a reorganisation of Visma’s internal processes. Visma is now positioned as one of the leading and largest SaaS companies in Europe, with more than NOK 2 billion of pure SaaS revenues.

How is it performing?Visma continues to see strong double-digit growth in revenue and EBITDA. Over the 11 years since Hg first invested in the business, Visma’s revenues and EBITDA have seen compound annual growth of 17% and 23% respectively. Following the announced realisation and further reinvestment by Hg, the Company’s valuation of its stake in Visma saw an increase of £36.5 million over the course of 2017.

How will we crystallise value?Visma has a scale and growth profile which would make it an attractive candidate for an initial public offering (‘IPO’) or a large ‘private IPO’, where multiple larger institutional or sovereign wealth investors could invest in the business without requiring its shares to be listed.


Business descriptionVisma is a leading provider of mission critical business software to SMEs in the Nordic region and the Netherlands. Headquartered in Oslo, with significant revenues in Sweden, Finland, Denmark and the Netherlands, the company provides accounting, resource planning and payroll software to its customer base of over 600,000 enterprises.

website: www.visma.com

Investment sector: Technology

Location: Scandinavia

Investment date: Aug 2014

Original enterprise value: NOK 21 billion

Hg clients’ total equity: 41.5%

Residual cost (£’000): 45,365

Unrealised value (£’000): 97,009

The Company’s underlying investment through HGT 7 LP and co-investment through HGT LP

1

Why did we invest?Hg has been an investor in IRIS since 2004, retaining a minority stake following its sale and merger with CSH in 2007 and becoming a majority investor again in 2011, when we separated the two businesses. IRIS is one of the earliest examples of our focus on business-critical software firms operating in attractive, predictable end markets. IRIS operates a business model with over 80% of revenues coming from subscriptions, and high customer retention rates, driven by consistent regulatory updates and additional features as part of their subscription. The investment decision was based on the potential for organic growth and acquisition led consolidation opportunities in the sector.

How do we intend to create value?The company is achieving strong organic revenue and profit growth through a combination of market share gains, price optimisation and the ongoing development of new solutions to sell into the existing customer base. Furthermore, the UK accountancy and SME software markets remain fragmented, offering additional acquisition opportunities. IRIS has always been at the forefront of providing the most innovative products to its customers and will continue to invest in new technology to meet all of its customers’ needs. In addition, we think there is substantial upside by developing or acquiring SaaS products to target adjacent markets.

What has been achieved?IRIS has been successful in broadening its addressable market by expanding its offering, both by organic product development and by acquisition. The company has also successfully established a Cloud Division to sell SaaS products to UK accountants and SMEs. In 2016, IRIS acquired Octopus HR and PS Financial, further broadening its offering. In August 2015 and October 2017, IRIS was refinanced on the back of its strong trading performance.In December 2016, Hg agreed to purchase a further minority stake in IRIS from Lloyds Development Capital for a total consideration of £29.7 million.

How is it performing?IRIS has been able to maintain strong levels of revenue, EBITDA and cash flow growth across market cycles, with the annual EBITDA margin consistently close to 50%, excluding the Cloud Division. The Cloud Division has received significant investment in recent years to support growth, as we believe this is an attractive market with long-term growth potential and strategic value; it is expected to achieve profitability in FY19. Over the last twelve months IRIS has delivered double-digit revenue and EBITDA growth.The Company’s valuation of its stake in IRIS has seen an increase of £19.4 million over 2017, driven by continued strong trading.

How will we crystallise value?IRIS would be an attractive acquisition target to a financial buyer, due to its strong organic growth, margins, cash conversion and recurring revenue. It would also represent a strong strategic fit with a number of trade players.


Business descriptionHeadquartered in Berkshire, IRIS is a leading provider of business-critical software and services to the UK accountancy market and payroll applications to key business segments, including the UK general practitioners’ market.

website: www.iris.co.uk


Location: UK

Investment date: Dec 2011

Original enterprise value: £425m




The Company’s underlying investment through HGT 6 LP

2


Why did we invest?Hg’s technology team tracked Sovos (previously Taxware) for two years, as we identified the company as a scale specialist in tax compliance for enterprise customers. We also saw the potential to expand the company outside the US market. Sovos sits right in the Hg ‘sweet spot’ with a strong and predictable business model, including: >90% contractually recurring revenue; a fragmented, loyal customer base; high margins; and robust cash conversion. Sovos’ largest, core products have achieved consistent double-digit organic revenue growth.

How do we intend to create value?In addition to continuing to grow revenues organically, Sovos has a strong track record of acquiring and successfully integrating tax compliance software companies. The market remains fragmented and hence we believe there are many attractive opportunities for Sovos to grow by acquisition. There is additional potential through further margin improvement.

What has been achieved?In June 2016, Sovos announced the acquisition of Invoiceware International, based in Atlanta and Sao Paulo. This expands the company’s capabilities in Latin America and adds the industry’s only solution for handling electronic invoicing and fiscal reporting in multiple countries from a single platform. A new Chairman and CFO were also recruited. In August 2017, Sovos announced the acquisition of Paperless, based in Santiago, Chile, which complements Invoiceware’s product offering and provides Sovos with a sector leading solution for business to government reporting – a form of regulatory compliance which has spread to more than 60 countries.

How is it performing?Sovos has seen rapid growth since our investment in early 2016, driven by strong organic growth in its core products. We are carefully monitoring the potential impact on Affordable Care Act (‘ACA’) revenues following the ongoing attempted changes to this regulation in the US, however we note that this product represents only a small proportion of overall company EBITDA. We have also been successful in deploying material capital into M&A and see a significant number of additional opportunities ahead of us. The Company has benefitted from an increase of £14.2 million in the Company’s valuation of its stake over 2017 driven by strong trading performance.

How will we crystallise value?We believe Sovos will be an attractive acquisition target for private equity buyers, as it demonstrates high levels of organic revenue growth, high EBITDA margins, has a very high proportion of recurring revenue and strong market positioning. However, we also see an IPO as a potential route to exit, given the strong cash generation and increasingly international reach. Lastly, there are several potential trade buyers.

Business descriptionSovos Compliance (‘Sovos’) is a global provider of compliance solutions, managing all aspects of the tax compliance process, from tax calculation, forms completion and ultra-high volume filing to secure funds transfer to state and local revenue departments. At the heart of Sovos’ software suite is a powerful tax calculation engine that leverages the industry’s most comprehensive repository of more than 210 million tax rules, in over 13,500 jurisdictions, across more than 200 countries.

Headquartered in Boston, USA with a presence also in Europe and Latin America, the majority of revenue is generated in the US from a customer base of c.4,500 corporates.

website: www.sovos.com


Location: North America

Investment date: Mar 2016

Original enterprise value: $700m





3


Why did we invest?JLA has enjoyed strong operating performance, including sustained organic growth through the period 2007–2009 and displayed many of the business model characteristics that we look for: a diverse customer base that considers laundry, catering and heating as mission critical parts of their day to day business; a large proportion of customers in long term contracts (representing a high level of revenue and a greater proportion of profits) providing good visibility of future revenues; significant headroom for further organic growth both via new customer wins and also upselling to existing customers; and potential for selective M&A.

How do we intend to create value?Hg is working alongside management to increase the benefit of selling new products and services through JLA’s existing sales force and service network. Following the successful extension into the catering industry, the business is now rolling out a similar proposition in heating, whilst the management team are working on other new industry verticals where JLA’s service proposition could also add value. In addition, we plan to continue to make further bolt-on acquisitions across the laundry, catering and heating markets.

What has been achieved?A number of projects have been initiated covering strategic planning, customer retention and pricing. Management has been strengthened and several acquisitions of laundry and catering companies have been completed, all funded from free cash flow. The business now has a dedicated M&A team, with three acquisitions completed in 2017 (in both Laundry and Catering) and a pipeline for further acquisitions under development. 2016 saw the opening of a second contact centre in Manchester to extend the existing sales & marketing capabilities. The new site is delivering promising results, adding large cohorts of new customers. In December 2015, Hg completed the refinancing of JLA and the sale of a minority interest to institutional investors, returning £17.3 million of cash proceeds to the Company. These transactions, together with previous distributions, and a further re-financing in January 2018 have delivered a 2.1x multiple on original investment in cash, whilst retaining 62% of the equity in the company.

How is it performing?JLA continues to see year-on-year organic growth driven by growth in the core Total Care and Circuit divisions. This has been enhanced by expansion into the catering sector and will be further supported by the ongoing expansion into the heating sector. Investment into the catering division and transition of customers to the Total Care offering should increase margins further. JLA has continued to grow equity value through robust and consistent underlying trading, leading to an increase of £5.7 million in the value of the Company’s stake in 2017.

How will we crystallise value?Hg is focused on positioning JLA as a platform for selling critical asset maintenance services into SMEs. We believe that the long term recurring nature of contracts coupled with strong customer loyalty will support an attractive rating at exit to a private equity investor or a trade buyer.

Business descriptionJLA is a leading provider of ‘on premises’ laundry, catering and heating services, providing distribution, rental and servicing of commercial laundry machines, catering and heating equipment to the UK SME market, mainly to care homes, primarily through the ‘Total Care’ offering (an eight-year rental and service contract of machines/equipment). The company is also a leading provider of commercial laundry machines into accommodation units (e.g. universities, worker accommodation units, leisure parks, etc.), which it serves via its Circuit brand.

website: www.jla.com

Investment sector: Services

Location: UK







4


Why did we invest?CogitalGroup continues the Services team’s record of investing in regulatory driven businesses within Hg’s ‘sweet spot’ business model focus. We have been tracking the SME accountancy and advisory services sector for many years as it exhibits several attractive criteria, including: a high share of repeatable revenue due to the mission-critical nature of the services; high retention rates due to the trusted nature of the adviser relationship; serving fragmented customer bases; fragmented competitive landscapes allowing for significant M&A opportunities; and an opportunity for high margin improvement driven by the increased use of technology, near shoring and scale.

How do we intend to create value?We are principally focused on three valuation creation levers: driving organic growth across the Group; pursuing the acquisitions of small accounting, audit & payroll offices, and advisory businesses; and improving EBITDA margins through technology.

What has been achieved? Since the creation of CogitalGroup, the management team has been focused on maximising group synergies, pursuing M&A in all geographies, and rolling out technology across the Group.

How is it performing?CogitalGroup is trading in line with expectations and this has led to an increase in the Company’s valuation of its stake of £7.5 million over the year.

How will we crystallise value?We expect the business model characteristics of CogitalGroup to be appealing to a wide range of financial sponsors at exit. We also think an IPO is a possible exit strategy.

Business descriptionCogitalGroup was launched in December 2016 through the acquisitions and merger of Nordic based Azets (formerly named Visma BPO) and UK based firms Baldwins and Blick Rothenberg. The Group’s focus is on the provision of critical business support, BPO and advisory services to the entrepreneurial and private company business segments together with their owners and managers.

In total, the Group now has c.60,000 clients with more than 4,000 employees operating from 135 offices in the UK, Norway, Sweden, Denmark and Finland. The Group also has 600 employees based in Romania and Lithuania working in highly cost efficient operating and processing centres.

website: www.cogitalgroup.com


Location: UK

Investment date: Oct 2016






5

Why did we invest?Capital markets software has been a strong focus for Hg since 2002 and the technology team has followed Ullink since 2009. This investment is in line with Hg’s sector focused approach of investing in leading global providers of vertical market application software. Ullink shares many of the core characteristics that Hg looks for: an excellent platform for growth; a subscription revenue model; and a diversified and loyal client base.

How do we intend to create value?Ullink is differentiated by offering a more modern and flexible trading system at a lower cost of ownership. Hg will support the business in accelerating its strong organic growth, through increased new customer wins from investment into the sales and marketing functions. We also believe there is an opportunity to consolidate smaller players in electronic trading, with the acquisition from The New York Stock Exchange of NYFIX and Metabit in September 2014, a significant step forward. This acquisition has given the business a broad international footprint and offers substantial opportunities to increase sales to the current customer base, as well as cost efficiencies and shared infrastructure.

What has been achieved?The acquisition of NYFIX and Metabit was transformative for Ullink and more than doubled the revenue of the business. Since then, the new management team, appointed in 2015, has been focused on the integration of the three businesses and realising the strategic value of the combination.Hg is currently working with Ullink on the following initiatives: implementation of a new pricing plan; implementation of detailed customer satisfaction measures and account management; assessment of further M&A; and a review of segment profitability and drivers of margin and investment.

How is it performing?The NYFIX and Metabit acquisitions have been well integrated into Ullink and its performance has substantially improved. Substantial investment was made in late 2015 into sales and marketing as well as research and development to drive increased revenue growth going forward. We are seeing the benefit of this with stronger revenue and accelerated EBITDA growth. Ullink is highly cash generative and returned £44 million to Hg clients in May 2017, including £4.3 million to the Company, through a refinancing.The sale of Ullink, announced in November, has led to an increase of £9.5 million in the Company’s valuation of its stake in Ullink over 2017.

How will we crystallise value?In November 2017 Hg announced that it has received a definitive binding offer from Itiviti, a company backed by Nordic Capital, to acquire Ullink, subject to French workers’ council consultations and customary approvals, such as regulatory clearances.This sale is expected to complete in March 2018 returning £24.3 million in proceeds to the Company; this was fully reflected in the December valuation. This transaction is estimated to deliver a 3.0x multiple on cost and 35% gross IRR over the investment period.


Business descriptionUllink is a leading provider of electronic trading applications and connectivity to the financial community. Founded in 2001, Ullink has grown quickly to become a global provider of multi-asset trading technology and infrastructure. Ullink has over 2,000 customers from c.40 countries with customers ranging from tier 1 global sell-side brokers to regional niche specialists across Europe, North America and Asia Pacific. The business is headquartered in France, although c.75% of staff and c.90% of revenue are outside that country.

website: www.ullink.com


Location: France







6


Why did we invest?The Services team identified the insurance broking sub sector as attractive for potential investment in 2011, as it is characterised by businesses with high levels of recurring revenues, providing a non-discretionary purchase for customers, with strong cash generation and opportunities for bolt-on M&A. A-Plan was identified as part of this market mapping exercise, and had been tracked by the Services Team for three years, prior to our investment in the business. A-Plan has a personal, service oriented approach leading to best in class levels of customer satisfaction, driving high retention rates and low customer acquisition costs, due to a high referral rate.

How do we intend to create value?Hg intends to support A-Plan’s experienced management through organic growth of its current business volumes in the existing branches and assisting with the roll-out of new branches. Additionally, there are potential opportunities for further growth, through selective M&A and new product lines.

What has been achieved?Hg is supporting A-Plan with ongoing and future projects, including: sales and marketing initiatives, such as direct mail campaigns and the contracting of a search engine optimisation agency; recruitment of senior executives; support on M&A development; and an upgrade of the legacy broking administration technology system.In March 2017 the Services team completed a refinancing of A-Plan, returning £52 million to clients including £5.2 million to the Company (35% of the original investment made).

How is it performing?A-Plan is performing well and is ahead of our original investment case on both a revenue and EBITDA basis, with growth over the last twelve months of 12% and 7% respectively. New business policies are benefiting from the continued branch roll-outs (14 since Hg initially invested in the company) and digital marketing initiatives driving new business at existing branches.Continued growth in equity value from consistent underlying trading growth has added £5.1 million to the Company’s valuation of its interest in A-Plan over 2017.

How will we crystallise value?A-Plan appeals to many buyer groups, including a trade or financial buyer. The company could also be of interest to yield investors or, when it reaches critical size, an IPO might be feasible.

Business descriptionA-Plan is a UK based distributor of motor and household insurance policies to SMEs and individuals. It also specialises in a number of high net worth and commercial niches, and in providing policies for foreign language speaking customers. It has a broad base of over 30 underwriters.

The business currently operates over 85 high street branches nationwide, focusing on high levels of customer service and more complex cases than online brokers, serving over 675,000 policies.

website: www.aplan.co.uk


Location: UK

Investment date: Apr 2015






7

Why did we invest?This investment represents a continuation of Hg’s theme of investing in leading payroll and HR related businesses. Raet demonstrates many of the business model characteristics that Hg looks for, including: high levels of recurring revenue; high cash flow generation; strong customer loyalty; and a strong management team. The investment is another example of the close cooperation between our teams, with the Munich and technology teams working closely together on the transaction, sharing resources and knowledge from prior transactions in this space.

How do we intend to create value?Hg will support the management team to accelerate growth in the Netherlands, with a greater focus on sales force effectiveness accelerating new wins and improved customer engagement. We believe there is an opportunity to deliver cash margin improvements through operating leverage and efficiency gains available in R&D, service delivery and central functions; and we see a significant opportunity to expand operations beyond the core Netherlands market, both organically and through M&A and partnerships. We see a substantial opportunity to leverage Raet’s expertise and technology across geographies and grow the scale of the addressable market.

What has been achieved? Hg has prepared plans, for implementation over the next 12 to 18 months, to support Raet in the following initiatives: rolling out more detailed financial reporting and key performance indicator packs; putting the cost reduction plan into operation; strengthening the M&A function; and building out review processes.

How is it performing?Raet completed 2017 in line with its original budget and slightly behind expectations at the time of Hg’s investment due to increased R&D investment. In 2018, we would expect to see some acceleration in revenue performance and will continue to invest in the business to support large new client wins delivered in 2016 and drive future growth.The business has been valued modestly above the original investment value, primarily due to increased ratings and favourable currency movements.

How will we crystallise value?At the time of exit, we would expect there to be significant interest in the business from financial buyers, with likely acquirers ranging from large cap private equity firms, with a focus on software, to alternative capital pools. We also anticipate strong interest from trade buyers with a strategic overlap.


Business descriptionHeadquartered in Amersfoort, the Netherlands, Raet is a leading provider of HR cloud software and services to more than 1,200 customers internationally.

The company is in the process of expanding its international footprint in both Europe and South America. It currently employs more than 1,000 staff.

website: www.raet.nl


Location: The Netherlands

Investment date: May 2016

Original enterprise value: €493m





8


Why did we invest?Achilles is a subscription based network business model with significant recurring revenue streams. It is a leading company in supply chain data, with stable growth driven by the increasing need for risk management.

How do we intend to create value?With high levels of contracted revenue, Achilles’ position as a global, scalable business model has considerable potential in revenue and margin growth, as well as multiple opportunities for expansion into new geographies and industries.

What has been achieved?We have made a significant investment into the business, focusing on the development of their technology, processes and sales to support global growth. The business is currently developing a variety of data products, that will benefit stakeholders in the supply chains.During 2015, Achilles raised an additional £40 million of equity (of which the Company’s share was £10 million) to continue to enhance significantly the global scalability and competitive positioning of the business.

How is it performing?We have completed the recruitment of a high quality management team who will deliver a strong exit for Hg’s investment. The team have already made material improvements to the cost base by restructuring lower contribution communities, and through the 2018 financial year have evidenced material new client wins (buyer and supplier). We believe that the financial performance of the business in the 2019 financial year will reflect the team’s work and provide a value creating base for an exit in the medium term. As we look towards exit, the company’s core objectives are to continue organic revenue growth, whilst defending and improving margins.The Company’s valuation of its stake in Achilles fell marginally over the year, awaiting improved operational performance to flow through.

How will we crystallise value?There has been strong interest in Achilles from both strategic and private equity buyers and the business’s recurring revenue base is likely to maintain this interest throughout the economic cycle.

Business descriptionAchilles manages a global network of collaborative industry communities. The business provides a cloud based service, enabling networks of buyers to create industry standards for collecting and validating supplier information. This is made available through the Achilles platform, together with search, reporting and risk management tools.

Suppliers join the platform to gain access to the whole community of buyers and information to help them achieve and maintain compliance. Both buyers and suppliers pay annual subscription fees.

The verified data gathered and delivered by Achilles is crucial to support processes around risk management and compliance with regulatory, social responsibility and health & safety requirements. Achilles currently operates more than 30 communities, across 22 countries, in five continents.

website: www.achilles.com


Location: UK

Investment date: Jul 2008





The Company’s underlying investment and co-investment through HGT LP

9

Why did we invest?Hg has known the company for several years and this investment is in line with our sector-focused approach of investing in leading global providers of vertical market application software. Foundry shares many of the characteristics that we look for, providing an excellent platform for growth across a diversified client base and a commitment to innovation. Foundry is rich in intellectual property and positioned well against favourable segment trends that could allow for an upside return to be achieved through a number of new business initiatives. We see potential from continuing to leverage world-class products in new segments.

How do we intend to create value?Hg is working closely with the management team to help the business accelerate its high rate of organic growth, in particular the ongoing development of disruptive technologies driving creative control and production efficiency. We are also working with Foundry to identify value accretive M&A to support the business and its management in building a global software champion.

What has been achieved?In December 2015, we appointed a new management team to lead the business in its next phase of growth, and supported them in refinancing the £50 million bridge loan which was used to finance the initial purchase of Foundry.Hg has worked with management to implement new pricing and business models, launch a number of specialist products in the 3D design and VR sector and improve the organisation and processes of the sales function.

How is it performing?In 2017, Foundry’s revenues grew by 12% while EBITDA increased by 54%. The core NUKE business is performing in line with our investment plan, but existing non-NUKE products – particularly MODO – and new investment products are behind our initial plan on both revenue and EBITDA contribution. Foundry is valued at 1.3x cost.Strong trading performance over 2017 has led to an increase of £5.1 million in the Company’s valuation of its interest.

How will we crystallise value?We believe Foundry will be an attractive acquisition target to both trade and financial buyers, given robust organic revenue growth, high EBITDA margins and large market share – particularly of its core NUKE product.


Business descriptionFoundry is a leading global developer of computer graphics, high-end visual effects (‘VFX’) and 3D design software for the design, visualisation and entertainment industries. The company was founded in 1996 and is headquartered in London, with offices in Manchester, Los Angeles and Silicon Valley; it has more than 2,000 customers in over 100 countries and employs c. 270 people.

The firm has set the de facto standard in the film post-production VFX space with its NUKE product. In 2012, the company acquired MODO, a 3D modelling product that gained the company access to the gaming and design segments. Since the acquisition, Foundry has grown MODO significantly by funding development projects in the design sector.

website: www.foundry.co.uk


Location: UK







10


Why did we invest?Legal process and regulatory compliance software is a core Hg sector, and one we have invested in before and are currently invested in through STP, which supports insolvency processes and mid market practice management in the DACH region of Europe. Hg’s technology team have looked at many targets in this fragmented sector, however, Mitratech is one that is sufficiently large and attractive as a standalone investment.

How do we intend to create value?Hg intends to support Mitratech through both continued organic growth of the business and as the best placed platform to drive a global sector roll-up. The business has a strong management team with a best in class core product taking share from weak competition in a growing market. Mitratech has a proven track record of organic growth and we will look to add to this through M&A.

What has been achieved?Hg is working with the management of Mitratech to source M&A opportunities in Hg’s core markets of Western Europe. Hg’s Operations Innovation team is working with management on the proposition and pricing in particular for the e-billing products.

How is it performing?Performance in the 2018 financial year was below budget expectations, achieving EBITDA of $36 million vs. $41 million budget, driven by a shortfall in software bookings and non-recurring license and professional services revenues. We are working with management on a revised plan for the 2019 financial year which will be more focussed on the strategic core of the business and key value drivers. We believe the Enterprise Legal Management core of the business, which was central to our investment thesis, remains healthy with a strong position in the market and 43% ARR growth in the 2018 financial year. Overall, run-rate recurring revenue grew 21% in the 2018 financial year and we believe puts Mitratech in a position to accelerate growth in 2019.Mitratech has been valued slightly below the original investment cost mainly due to negative foreign exchange movements.

How will we crystallise value?We believe Mitratech will present an attractive acquisition target to a number of trade acquirers in the Legal, Enterprise Content Management (‘ECM’) and Governance Risk and Compliance (‘GRC’) sectors where its position as the leading ELM vendor holds high strategic value. Equally, we expect that Mitratech will continue to be attractive to Private Equity buyers given high organic growth, recurring revenue, EBITDA margins and market position.

Business descriptionMitratech is a leading global provider of enterprise legal management (‘ELM’) software to corporate legal departments. The core product is Matter Management, which acts as the Enterprise Resource Planning software at the heart of in-house legal teams, and an e-billing solution which provides e-invoicing capabilities between corporate lawyers and external law firms with automatic invoice review.

Mitratech serves a wide customer base of c.1,000 corporate customers across the world, including 40% of the Fortune 500. Over 650 law firms are using the e-billing platform to transmit invoices to clients, including all of the AmLaw 200 and 99% of the Global 100 Law Firms. The company is based in Austin, Texas with further offices in the US, England, Wales and Australia, employing c. 370 people.

website: www.mitratech.com



Investment date: Apr 2017






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Why did we invest?Our Services Team had previously identified accountancy services as a core focus area and the investment in Radius illustrates Hg’s approach of making repeatable investments in its target sectors. We have a demonstrable track record of identifying and working with leading technology enabled service companies to achieve sustainable growth.Radius has all the characteristics that we look for in an investment: it is a provider of mission critical services to a fragmented customer base; benefiting from a repeat revenue model; and utilising a scalable technology platform to generate high margins.

How do we intend to create value?Hg intends to support continued organic growth of the business through increased customer wins. We will target various operational and system improvements with potential for efficiency gains (e.g. billing/invoicing processes) and margin expansion. Further M&A opportunities to expand the service offering or global scope of the business as well as potential product extensions have been identified.Additionally, we see a significant opportunity for the business to be re-rated following fundamental improvements in the business model and processes.

What has been achieved? Hg has worked with Radius to strengthen the management team, processes and systems, evaluate further M&A opportunities, support integration and review professional services billing.Radius has undergone significant integration over the past two years. This is now largely complete and the business is now fully focused on future growth.

How is it performing?Radius has continued to grow through a period of substantial change, with strong double-digit EBITDA growth in 2017. We also completed one small acquisition of DB&C, a payroll provider in the Netherlands. Favourable exchange rate movements over the year have benefited Radius’ profitability and the valuation of the Company’s stake at year-end when translated into sterling. The lack of revenue growth has led to a lower rating being applied to this investment and the valuation has therefore been written down accordingly.

How will we crystallise value?We believe that the margin and sales growth profile of Radius will support an IPO, when the company has reached sufficient scale. However, we would also consider a sale to another financial investor or a trade buyer that wants to enter the internationalisation services market.


Business descriptionRadius was established by merging Nair & Co. with High Street Partners. The company provides tailored solutions for fast-growing companies that are looking to expand into international markets. Radius sets up the required international entities and integrates legal, accounting, payroll, tax and human resources services to ease the process of international expansion. It is headquartered in the US, and has over 800 employees based in offices in Boston, San Francisco, New York, Houston, India, UK, Singapore, Japan and China.

website: www.radiusworldwide.com



Investment date: Aug 2013






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Why did we invest?The A2P industry is operating in a fast-growing market but remains fragmented in most geographies and the key bases of the investment hypothesis are: strong organic growth in the A2P sector is expected to continue driven by further use case expansion and increasing adoption across Europe; an opportunity for targeted M&A; and a wider portfolio of messaging technologies to provide customers with a channel agnostic platform to communicate with their customers and employees.

How do we intend to create value? Our initiatives are targeted at scaling the business and maximising our strategic value to potential acquirers through building a robust pan-European business. Key initiatives are: M&A; building out the management team and supporting the integration of the existing businesses into a much larger business; and improved financial reporting through an integrated finance function.

What has been achieved?Hg originally acquired Mobyt in 2016 and this was followed by the acquisition of SMS Envoi, Esendex and SMS Publi.In the second half of 2017, we significantly expanded the executive team with a new CFO, CTO and CCO all hired since our investment. The integration of the existing businesses is also well underway with visible improvements across reporting and development of a cohesive pan-European strategy.

How is it performing?We continue to see strong organic growth (both from new customers and existing customers spending more) across all the businesses. This drove revenue growth of 16% for the LTM period to December 2017 on a like for like basis to €82 million.

How will we crystallise value?At the time of exit, we expect there to be significant interest in the business from trade buyers (other consolidators in Europe and the US). Acquirors of A2P businesses have been active in Europe as well as the US. We also expect interest from capital markets given the revenue and earnings growth profile as well as pan-European exposure.

Business descriptionEsendex Group is a leading Application-to-Person “A2P” messaging service in Western Europe. The customer base is mainly SMEs and some larger enterprises who use Esendex’s services to communicate with their end customers through messages, voice, and a number of other media. The purpose of the communication can be varied, but most messages are mission-critical, operational content such as appointment reminders and delivery notifications; the business also supports marketing/promotional messages and coupons and surveys. The business has grown organically and through M&A over the past 10 years and now sends over 2 billion SMS on behalf of over 30,000 customers across the UK, Italy, France, Germany, and Spain.

website: www.esendex.com


Location: UK

Investment date: Jun 2017





The Company’s underlying investment through HgCapital Mercury D LP and co-investment through HGT LP

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Why did we invest?Allocate has a long term growth opportunity driven by the fundamental needs of its customers for efficiency, compliance and safety. The business has many of the characteristics that Hg looks for in an investment: a leader in its sector with strong growth potential; a large and engaged client base; and a significant and predictable proportion of repeat business.

How do we intend to create value? Hg will support Allocate’s management team in delivering continued development and sustainable growth of its product portfolio and in improving operational effectiveness. Hg will also support Allocate’s management to identify potential bolt-on acquisitions and to explore further international growth beyond its existing markets. Further, there are a number of direct opportunities for collaboration between Allocate and other technology businesses within Hg’s existing investment portfolio which will provide the potential for additional growth.

What has been achieved? Following the appointment of Dr Sati Sian as CEO in September 2015, Hg has supported the management through: introductions to senior healthcare experts and systems from our extensive network in the sector; helping to review M&A and partner relationships; and hiring new key personnel.During 2016: Allocate completed a refinancing, returning 30% of the original investment; executed the separation of the Healthcare operations from Dynama, the Defence & Maritime business unit; shifted the business model significantly to increase recurring revenue; and accelerated the pace of R&D investment significantly scaling the R&D team.During 2017, Allocate completed two acquisitions, entered four new markets and launched two major new products. The acquisitions were firstly to enter the French market and a small IP acquisition. The company won new customers on the core platform in Germany, Denmark and Spain, in addition to the acquisition in France. The new product launches include: a new platform for scheduling community healthcare professionals and Cloudstaff, a platform that enables trusts to share nurse banks, reducing agency spend.

How is it performing? Allocate reported strong organic revenue growth in the financial year to 31 May 2017 and this has continued to the calendar year end, with 17% revenue growth and 22% EBITDA growth for the LTM to 31 December 2017, with recurring revenue growing significantly ahead of this. Given this strong trading performance, the Company’s valuation of its stake in Allocate Software has risen by £4.0 million over 2017.

How will we crystallise value? Allocate operates in a valuable, niche sector and we would expect this to attract both trade and financial buyers.


Business descriptionAllocate Software is the leading international provider of healthcare workforce management software.

Its core product is used for workforce rostering, time & attendance, and associated compliance workflows (e.g. monitoring and reporting on safe staffing levels). Allocate’s products address a clear and increasingly pressing need for improved staff efficiency, patient safety and regulatory compliance.

The business has two segments: the core Healthcare operations, which serves healthcare institutions across the UK, Sweden, and continental Europe; and Dynama, the leading provider of workforce and resource optimisation software to the Defence & Maritime industries.

website: www.allocatesoftware.com


Location: UK

Investment date: Dec 2015





The Company’s underlying investment through HgCapital Mercury D LP

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Why did we invest?Citation operates in the regulatory driven compliance services sector for SMEs, which is structurally growing at single-digit rates. Under the current management team, the business has improved and professionalised its sales & marketing function which has driven double-digit organic growth. Citation is one of the highest quality businesses in this sector, noted for its high levels of customer satisfaction resulting in market-leading retention rates.

How do we intend to create value?We believe that satisfaction levels among Citation’s customers provide the opportunity to sell more through new adjacent services and an expansion of their offering. There is also a significant opportunity for M&A in both the Employment Law and Health & Safety compliance and ISO certification markets, which are highly fragmented with a large number of smaller local players.

What has been achieved? The management team, with the support of Hg, have launched several initiatives focused on improving lead generation, developing new products and services to sell to existing customers and improving financial reporting, budgeting and controls. The business has successfully developed new products this year (fire risk assessments and care policies), which are now being sold to both new and existing customers. Two acquisitions were also completed in 2017: P&R, a provider of electrical compliance services; and EPM, an education-focused provider of HR and payroll services.

How is it performing?Citation is seeing year on year double-digit organic revenue growth across both divisions, driven by strong new sales performance and upselling new products and services into the customer base. This has been supplemented by M&A driven growth via the two acquisitions completed this year. Given Citation is a relatively new investment, 2017 was a year of investment in growth initiatives, from which we expect to see the benefits in 2018. As a result, the investment is valued broadly in line with its initial cost.

How will we crystallise value?Citation’s regulatory driven services and long term subscription based revenue model will continue to attract private equity interest at exit. In addition, there are also a number of potential trade exit opportunities across the accounting, payroll, HR and legal services space.

Business descriptionCitation is a leading provider of outsourced HR, Employment Law, Health & Safety and ISO certification services to over 20,000 customers across the UK.

Citation helps SMEs comply with the relevant Employment Law and Health & Safety regulations. Customers have access to 24/7 advice from highly skilled and qualified experts in the fields of HR, Employment Law and Health & Safety who can assist with a broad range of business related issues.

Citation also provides ISO certification and consultancy services to SMEs under a separate brand (‘QMS’). QMS has helped implement over 20,000 management systems in organisations across the UK, which are then certified as being in line with international standards of quality. Its services are highly complementary to Citation’s, with a significant opportunity to cross sell services across both customer bases.

website: www.citation.co.uk


Location: UK







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Why did we invest?Hg sought to apply its experience in more mature markets of business-critical, regulatory-driven software (in the Nordic region, UK and Germany) to a leader in a less developed market. Italy is characterised by a high level of frequently changing regulation and lower penetration of dedicated purpose software. TeamSystem is highly predictable due to its business critical nature, strong customer loyalty and a large, fragmented customer base.

How do we intend to create value?Alongside organic growth, management has increased its cross selling of products to the existing client base through the use of add-on modules such as reporting, analytics and payroll. The potential to complete a number of bolt-on acquisitions of complementary businesses in Italy was identified at acquisition.

What has been achieved?Several improvement projects were identified post acquisition including: enhanced reporting and pricing: a revised product strategy, cash collection and working capital improvement; investment in the M&A process; and sourcing new ways to grow the micro SME customer base. In 2013, TeamSystem completed its debt refinancing through the issue of a public bond, lowering borrowing costs and providing financial flexibility for M&A. The focus on M&A has led to the completion of eleven acquisitions, most recently in 2014, the acquisitions of ACG from IBM and Il Sole Software in a carve-out from its parent company. These acquisitions significantly increased TeamSystem’s presence in the SME and professional services markets, and it is considering further product-led M&A targets.

How is it performing?TeamSystem continues to win market share and grow. The business has achieved 9% growth in sales in 2017, despite a weak macro-economic backdrop, as the benefits from synergies from the 2014 acquisitions started to come through. TeamSystem’s cloud offering continues to gain traction, generating high double-digit growth. The long term market outlook is positive as management implements a number of successful initiatives to drive further growth, and continues the integration of Il Sole and ACG.Strong trading over 2017 has led to an increase of £3.0 million in the Company’s valuation of its stake in TeamSystem.

How will we crystallise value?In March 2016, Hg completed the sale of a majority interest in TeamSystem to Hellman & Friedman. This transaction resulted in cash proceeds to the Company of £39.0 million. Since the initial acquisition, TeamSystem has returned 2.0x multiple on cost. With the retained stake in the business, Hg look to benefit from the anticipated growth and drive a higher multiple of cost in due course.


Business descriptionTeamSystem is a leading provider of business critical, regulatory driven software products to accountants, HR professionals and SMEs in Italy. Headquartered in Pesaro, the company has a large and diversified base of c.250,000 customers. It has 27 offices across Italy and employs over 2,000 people. In December 2015 Hg agreed to sell TeamSystem to Hellman and Friedman. As part of the deal, Hg rolled over a small minority stake in the business and retains a seat on the board.

website: www.teamsystem.com


Location: Italy

Investment date: Sep 2010



Residual cost (£’000): 144



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Why did we invest?Trace One fits Hg’s strategy of investing in companies with subscription revenues in regulatory-driven growth niches, and working with founder entrepreneurs looking to transition their businesses to the next stage of ownership. Trace One displayed a number of the investment characteristics targeted by Hg, including a regulatory-driven market segment, attractive commercial position, strong revenue visibility and loyal customer base. The business is exposed to long term, counter cyclical growth drivers, as the penetration of private label food increases globally and retailers increase the sophistication and breadth of their private label ranges, driving a greater need for collaboration with their suppliers.

How do we intend to create value?At signing, we were deliberately focused on a few key initiatives to support value growth. During 2016, we completed the spin-off of a loss-making start-up, a refinancing and a clear step up in profitability, and the onboarding of a new senior management team led by CEO Christophe Vanackère. Christophe joined with a strong background from a PE backed software business, and has had a very positive impact on the organisation, and customer base, and long-term strategic positioning. During 2017, the focus has been on longer-term growth including new products launch, a revised commercial strategy and identified cross-selling opportunities, and operational changes to support long term growth and scalability.

What has been achieved?During 2017, the focus has been on longer-term growth, including new product launches, a revised commercial strategy, identification of cross-selling opportunities and operational changes to support long-term growth and scalability.

How is it performing?During 2017, revenues grew by 8% over the previous year, and EBITDA grew by 51%. Trace One has signed several important customer renewals and an important new strategic partnership. Trace One’s Network and Insight solutions also show strong traction among existing customers, with very positive feedbacks from early adopters. These are favourable developments which confirm the business long-term growth plan.Strong trading performance over 2017 has led to a £2.9 million uplift in the Company’s valuation of its interest in the business over the year.

How will we crystallise value?By exit, we hope to have created a leading supplier of software to the retail sector focused on private label product lines, leveraging best in class software operations to support both retailers and private label suppliers with a broader range of software, data, and workflow tools. We expect the business to be attractive to software players in the Product Lifecycle Management, Supply Chain Management or ERP markets; or private equity via a secondary LBO.

Business descriptionTrace One’s cloud solutions enable global retailers and suppliers to collaborate and develop high quality, trusted and compliant private label products. The platform is critical for helping retailers and suppliers to manage innovation, product safety, traceability and quality. It serves a blue-chip customer base of over 25 leading retailers across Europe and North America, connecting to c. 20,000 member manufacturers. The business is headquartered in Paris.

website: www.traceone.com


Location: France







17

Why did we invest?This investment continues Hg’s strategy of partnering with great management teams in leading vertical application software companies.Intelliflo has an attractive, scalable business model with a high component of strong, organic recurring revenue growth; business-critical product; and high customer loyalty. There is also the possibility of significant value creation through sector share gains and cross-selling of new modules to existing customers.

How do we intend to create value?Hg identified initiatives to improve sales and marketing processes, improve retention, accelerate product release cycles, reduce support costs and optimise pricing. Hg further intends to maximize the potential of the business by expanding Intelliflo’s product suite by new module development and partnership with complementary third party vendors.

What has been achieved?The Mercury team has worked with management to implement a value growth plan across a number of areas, including: investment in sales and marketing capability, introducing a new inbound marketing platform; implementing best-in-class SaaS practices in technology development and operations; and strengthening Board capabilities.

How is it performing?2017 trading remains very strong with double-digit revenue and EBITDA growth over the period. This is accelerating as Intelliflo continues to gain market share in the UK. The two organic growth priorities remain continued share gain in the UK wealth management sector and the roll-out of an industry-leading automated advice offering. Intelliflo is highly cash generative, which enabled us to complete a refinancing in December 2016. This continued cash generation combined with strong trading performance underpins the £1.6 million uplift in the Company’s valuation of its interest in the business over 2017.

How will we crystallise value?Given the combination of Intelliflo’s end-user base, strong SaaS technology and natural positioning for cross-selling, the business should be attractive to a number of parties, including both UK and international trade and financial buyers.


Business descriptionIntelliflo is a UK SaaS provider of front and back-office software solutions to financial intermediaries, including SME IFAs, wealth managers, adviser networks, insurance/life companies and brokers. The business combines a decade-long track record in the UK market, with a best-in-class SaaS product. Significant capability was created by investment ahead of the Retail Distribution Review (‘RDR’), which is creating substantial change in the structure and professionalisation of retail financial services. Over 14,000 IFAs, mortgage advisors and administrators use Intelliflo’s software on a daily basis to manage front and back-office workflows and to respond quickly to consumer and regulatory needs. Headquartered in Kingston upon Thames, Intelliflo employs c.130 people.

website: www.intelliflo.com


Location: UK

Investment date: Jul 2013






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Why did we invest?Teufel has been well-positioned to take advantage of the loudspeaker market’s future growth potential due to the following factors: differentiated positioning with a strong brand; growth market; stable prices and margins; and control of the entire value chain.

How do we intend to create value?There is potential for further improvements in operations and better targeted and more effective marketing spend, as well as an extension of the product range, where we continue to launch new products, categories and technologies.Initial international expansion brought sales success and Hg has supported management in growing the business in existing and new sales channels in Germany as well as internationally.

What has been achieved?Since Hg partnered with Teufel in 2010, it has supported the successful transition from a traditional loudspeaker company to a European high-quality brand for state-of-the-art audio solutions, through the introduction of new categories and technologies, including wireless streaming, headphones and portables.This has been achieved through several initiatives: the acquisition in 2010 of Raumfeld, a wireless audio specialist; a pricing project in 2012 which led to a reduction in discounting activity and improved profits; a move to new offices in Berlin in 2014; strengthening of the management team in 2016, with an internally promoted CEO and a new CFO/COO focused on costs and operations; selective cost cutting initiatives to streamline and make the business more sustainable; and more recently the business launched a supply chain optimisation project.

How is it performing?For the full year 2016/2017, revenue was 6% above the previous year and on budget. This is a result of strong performance in the portable and headphone categories in the core DACH market, with steady progress being made in other categories. Trading performance over 2017 was very positive, with EBITDA being up more than 20%. This performance has led to the £6.6 million uplift in the Company’s valuation of its interest in the business over the year.

How will we crystallise value?With the emergence of trade activity in the audio sector (e.g. Denon/inMusic, Beats/Apple) and interesting growth opportunities materialising (e.g. growth in core markets, further bottom line initiatives, international growth, B2B business) we feel that both a trade exit or a secondary buyout are viable exit options.

Business descriptionTeufel is a leading European direct-to-consumer online brand for audio solutions with almost 40 years of experience and heritage. Teufel has high brand awareness in Germany and sells a range of award winning products online to a highly loyal customer base.

Teufel’s unique positioning – controlling its entire value chain – allows the business to sell at a price point lower than the competition whilst attaining superior gross margins. Based in Berlin with c.200 employees, the business is focused on the mid-to-high-end segment of the market and has also set up international business operations, with a current focus on Austria, Switzerland, and the Netherlands.

website: www.teufel.de

Investment sector: Industrial Technology

Location: Germany

Investment date: Jun 2012






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Why did we invest?Strategic HR software for large enterprises is a long-term growth sector. As an online SaaS provider, Lumesse experiences high levels of recurring revenue, leading to higher predictability as this product segment takes share from traditional ‘on premises’ software products. With strong organic sales growth, it was identified that further investment would drive share of the relevant sectors; revenue and strategic value over the longer term.

How do we intend to create value?Strategic HR software for large enterprises is a long term growth sector. Lumesse’s management intends to drive increased subscription revenues by capitalising on their innovative technology, improving cross selling and up selling into the existing customer base, as well as acquiring new customers in what remains an underpenetrated sector. There is also an increased focus on efficiency and scale effects, with a view to improving margins.

What has been achieved?Supported by Hg, management initiated a strategic review in 2014 in order to bring the business back to growth. This has led to significant investment into our core products; entering into an exclusive partnership with Salesforce.com to build an HR talent tool on the Salesforce platform; organisational restructuring to drive accountability for our products; an increase in efficiency through reductions in non-profitable cost areas; and strengthening of the management team (including the appointment of Hg Operating Partner, Didier Bench, as Executive Chairman in 2015). As a result, Lumesse saw a return to profitability in early 2016, while still pursuing its roadmap for future growth.

How is it performing?Lumesse has historically underperformed; however, following the release of new, fully revised and highly innovative versions of the core Lumesse products over the last 12-18 months, the business has experienced strong growth in sales, both to existing and new customers. In combination with Lumesse’s rigorous focus on clearly defined sweet spot customer target segments, we see considerable opportunity for future growth, which we expect to be reflected in future valuations.

How will we crystallise value?There is high demand for SaaS companies, providing multiple options for exit. Lumesse has attracted strong interest from trade buyers, although we will also consider a sale to another private equity buyer in due course.


Business descriptionLumesse is a European provider of strategic HR software (for recruiting, talent management and learning) to medium and large enterprises in Europe. It operates in 16 countries, with almost 550 full time equivalents (mostly based in the UK and Germany), driving a subscription based revenue model (more than 75% of total revenue) with a strong consulting element required to configure their solution to customer requirements. Lumesse’s products cover the entire HR management process, grouped into three areas: talent acquisition; talent management; and learning management.

website: www.lumesse.com


Location: UK







20

P&I is a leading provider of integrated software solutions for human resources management to the German and European Mittelstand. The business delivers payroll, core HR, human capital management, time and attendance as well as analytics to 15,000 customers across DACH and 11 further European countries via an integrated and highly automated private cloud based platform. Hg took P&I private via a public takeover offer in 2013, and re-invested into the business in 2016 alongside Permira.

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web: www.pi-ag.com

Sector: Technology

STP is a key provider of specialist software to insolvency administrators and law practices in Germany and Switzerland. STP has a strong track record in product development, customer service and innovation and is trading well, leading to an uplift of £1.8 million in the Company’s valuation of its interest in December.

21

web: www.stp-online.de

Sector: Technology

Eucon is a leading provider of automotive parts pricing data & services to vehicle and parts manufacturers globally. The business also provides a highly-automated claims management service to insurers in Germany. The business saw strong trading performance over 2017, driven by management initiatives leading to new contracts and an improved pipeline in both divisions. Driven by this performance, the Company’s valuation of its stake in Eucon rose by £1.8 million in 2017.

23

web: www.eucon.de

Sector: Technology

Kinapse is a global provider of advisory and operational services to the life sciences industries focused on regulatory affairs, safety and quality. The company counts 19 of the world’s top 25 pharma companies as clients providing both consulting and Business Process Outsourcing services from offices in the UK, US and India. Underperformance over 2017 has led to a write-down of £4 million in the Company’s valuation of its stake in Kinapse.

24

web: www.kinapse.com

Sector: Services

MeinAuto was founded in 2007 and is headquartered in Cologne with over 70 employees. The company is one of Germany‘s leading online platforms for new car sales with over 16 million visitors per year and more than 9,000 dealers connected. The business is a new addition to the Company’s portfolio.

25

web: www.meinauto.de

Sector: Services

Founded in 1995, DADA is headquartered in Florence, and has around 450 employees. DADA’s digital services enable SMEs to administer their online presence: creating, managing and hosting domains and websites. The company has a European-wide presence with operations in seven countries. Hg invested in DADA in late 2017.

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web: www.dada.eu

Sector: Technology

Many of our businesses outside the top 20 are also performing very well. The majority of these are within the Mercury Fund, which invests in TMT companies with EVs of more than £30 million. The Mercury investments are seeing high double-digit growth in both revenues and profits across its portfolio. They also sit firmly in Hg’s ‘sweet spot’, with a high level of recurring revenues, business-critical products, fragmented customer and competitor bases and low exposure to economic cycles. The vast majority of our investments have been into founder-owned businesses, and we have a strong proprietary pipeline.

Hg’s review | Annual Report & Accounts 2017 | HgCapital Trust plc

Other investments

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Based in Aberdeen, Atlas is an international learning technology solutions provider for safety critical industries (in particular for the oil and gas sector). Founded in 1995, it operates in well over 100 countries, serving more than 700 customers with over 500,000 employees. Driven by customers postponing investments because of macro-economic factors, the business was originally written down in 2014, with a further provision in 2016 of £4.6 million. The management, supported by Hg, have worked hard to recover value, and Atlas saw an increase of £3.2 million in the value of the Company’s stake over 2017.

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web: www.atlasknowledge.com

Sector: Services

QUNDIS supplies a full data management solution for the housing and utilities industries to collect, measure, and transmit consumption-dependent data for heating and water usage on an apartment unit level. In May, the Munich team completed the exit of QUNDIS, retaining a minority position in the combined group. The valuation of the Company’s stake in QUNDIS rose by £9.7 million over 2017.

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web: www.qundis.com

Sector: Industrial technology

EidosMedia, headquartered in Milan, is a leading global provider of digital publishing solutions with its digital publishing platform, Méthode. It is used daily by 30,000 journalists across more than 600 titles globally to create, customise and deliver content across print and web media channels. The business has seen poor trading over 2017 leading to a write-down of £1.4 million in the value of the Company’s stake. A new CEO was appointed in June with a focus on the transition to recurring revenues and new business wins.

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web: www.eidosmedia.com

Sector: Technology

Evaluate is a London-headquartered provider of commercial intelligence to the global life sciences industry, including all of the top 25 pharmaceutical companies. The company has a track record of consistent double-digit revenue growth within a segment with long-term growth potential. Over 2017, further positive trading performance has led to an uplift of £1.2 million in the valuation of the Company’s stake in Evaluate.

30

web: www.evaluategroup.com

Sector: Technology

Frösunda is one of the leading Swedish providers of care for individuals with learning disabilities, severe physical disabilities, and psychological/behavioural issues. Headquartered in Solna, Sweden, Frösunda employs around 9,000 staff and cares for around 3,200 people across Sweden. A decline in the customer base and higher central costs have led to a further write-down in the Company’s valuation of its stake in Frösunda over 2017.

31

web: www.frosunda.se

Sector: Healthcare

fundinfo is a data and information platform used by more than 550 asset managers to publish and disseminate their regulatory, compliance and commercial fund documents and data to distributors in over 15 countries. fundinfo operates one of the largest single normalised database of fund information in the world. Strong trading over 2017 has led to a small uplift in the Company’s valuation of its stake in the business.

32

web: about.fundinfo.com

Sector: Technology

Gentrack provides mission critical software including billing & CRM for utilities and management systems for airports. Gentrack focuses on utilities in Australia, New Zealand and the UK and airports globally. This investment is valued at its market price.

33

web: www.gentrack.com

Sector: Technology


Other investments continued

The Company has investments in two renewable energy funds: Asper RPP I and Asper RPP II. These fund investments continue to be overseen by the Manager.These funds are managed by a specialist renewable energy team formerly at Hg. On 30 November 2017, the team transitioned to Asper, a newly formed independent investment management firm. This transition had been in preparation for close to two years and is in line with the strategic plans of both Hg and Asper.The Asper team use private equity skills to identify, acquire and build high quality European renewable energy projects. Investment returns in this asset class are generated through a combination of yield during operation and capital gain at refinancing or exit. By bringing individual investments together into platforms, Asper enhances value through economies of scale, shared expertise and aggregated generation capacity. Asper has built a portfolio of high quality projects on time and on budget and operational performance remains ahead of the investment case across all platforms. However, valuations have been materially reduced by retroactive tariff changes in Spain; and depressed power prices in Sweden between 2010-2013. Since 2014 the Asper team has been working on a value recovery plan centred on: • investments in, and realisations from, the portfolio assets

unaffected by the adverse events; • arbitration proceedings against Spain for the retroactive

tariff changes; and • debt restructuring of distressed projects.

Realisations in 2017In July, Asper RPP II successfully realised a 60% stake in five operating wind farms from the Invis Energy platform (Irish Onshore Wind) to a Japanese consortium comprising trading group Sojitz Corporation, Kansai Electric Power Co. Inc and Mitsubishi UFJ Lease & Finance Co. Ltd. Also in July, Asper RPP II realised a 288MW pre-construction project in its Swedish wind platform Vasa Vind to APG, a major Dutch pension fund; and during the second half of the year it additionally sold its UK commercial rooftop platform REI to Aviva.These successful exits and the robust operating performance of the rest of the portfolio contributed to a substantial uplift of over 30% in the NAV of Asper RPP II over 2017.

Principal investments by platform

Total valuation

£’000

Irish Onshore Wind 11,672 Swedish District Heating 2,094 Swedish Onshore Wind 1,516Spanish Hydro 1,246 Other 181

Asper RPP II LP 16,709

Spanish Solar 766 Other 28

Asper RPP I LP 794

Total renewable energy investments 17,503


Renewable energy

Other investments continued

Diversification by value of investments

Geography 67% Ireland 21% Sweden 12% Spain

Resource 76% Onshore Wind 12% District Heating 7% Hydro 4% Solar

76% Onshore wind

12% District Heating

7% Hydro

4% Solar

Resource

Geography 67% Ireland 21% Sweden 12% Spain

Resource 76% Onshore Wind 12% District Heating 7% Hydro 4% Solar

21% Sweden

12% Spain

Geography67% Ireland

Documents

Hg’s review - hgcapitaltrust.com/media/Files/H/Hgcapital-Trust/... · Hg’s review HgCapital Trust plc| Annual Report & Accounts 2017| Hg’s review 19 Building businesses that