How we took this firm from a €400m to a €20bn business

Luke Finch of Hg Capital sits down with ii's Sam Benstead to discuss how HgCapital Trust Ord (LSE:HGT) is managed. The investment trust specialises in business-to-business software companies, such as Oslo-headquartered accountancy tool Visma, which Hg has taken from a €400 million to a €20 billion business.

Finch also assesses the outlook for the software sector in light of new developments in artificial intelligence (AI), and speaks about the revenue and profit growth rates of the Hg Capital Trust portfolio.

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Sam Benstead, fixed income lead, interactive investor: Hello and welcome to the latest Insider Interview. Our guest today is Luke Finch of Hg Capital, which manages HgCapital investment trust (HGT). Luke, thank you very much for coming into the studio.

Luke Finch of Hg Capital, which manages Hg Capital Trust: Thanks for having me again, Sam.

Sam Benstead: HGT invests in software businesses, but what is the outlook for the sector? What are the risks and what are the opportunities today?

Luke Finch: We just see huge tailwinds, which we just spoke about in terms of demographics, regulation, inflation actually, is another one. When inflation is high, expensive things get more expensive faster. So, your expensive workers get more expensive and you can't keep hiring more people in your finance team, for example, to help you with your accounts, and you need to use more software.

Then, obviously, you've got AI now as a huge shift in the software market, which we think is incredibly exciting.

Every 10 or so years you have these innovation waves rolling through software, going from mainframe to PC, PC to server, and then up into the cloud, and then the software as a service (SaaS) business model, which is still playing through now. On top of that, you've now got AI, and each of these waves builds on the last. So, we think that's an incredibly exciting time for us.

Sam Benstead: How are your portfolio companies using AI to improve their businesses?

Luke Finch: We think about it in two ways. One, there's the cost side. So, how are you improving your own processes using AI? Software companies themselves are pretty tech savvy, so they're probably at the forefront of using a lot of these new tools.

One of the biggest expense lines in our software companies over the years has been developing engineering talent. What we're seeing with some of the tools such as GitHub and GitHub Copilot, but now Devin and other sort of agentic tools that we're rolling out across the portfolio, is huge productivity gains across our engineering workforce.

That doesn't mean we're letting go engineers, it means we're doing more with the same number of engineers, so product innovation is happening faster.

Then, on things like customer support, again, we're seeing agentic tooling come in. Because of our size, we've got 50-plus portfolio companies, 150 billion of total enterprise value (EV), we are a big software company, if you look at it that way. We can do special agreements and deals with some of these new providers that we can roll out across the whole portfolio. So, we're seeing big productivity gains in customer support and that's on the cost side of our businesses.

On the product side, it's how do we take these LLMs (large language models) and the new tooling available and overlay that and offer up new product to our customers? I think what's really interesting for us is software for the last 40 years has been deterministic. You put some data through it and some rules through it, and out comes an answer that's right or wrong. LLMs are probabilistic software, so that's a whole new thing that software can do, it can create stuff based on the sum total of human language and what's probably going to be right.

That's super interesting because what it allows our companies to do is look at all the workflows that surround the core thing we're already doing. So, we're already helping you file your taxes. Well, what’s all the messy data aggregation, human touch points, and customer touch points that feed into that, and can software do more of that?

For us, we think that the LLMs, this new era, allows our companies to think about what else can we do for our customers? How else can we save them time and money and get more efficient.

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Sam Benstead: And on the other side, what is the bear case for software? What are you worried about as software investors? Is AI a disruptor as well as an opportunity perhaps?

Luke Finch: It's definitely a potential disruptor. I think if our companies stuck their head in the sand and decided it isn't going to impact them, then that will be a problem in the next few years.

Just like the last disrupting wave, which was kind of SaaS and moving to the cloud, old on-premises software businesses that stuck their heads in the ground and didn't think about that, they got badly disrupted.

It takes time, though, because you've got customers that need your service. The way we think about it in part is the opportunity is what's all the other messy workflows that we can do? Well, if someone else goes and does those messy workflows first, then can they come back into your core workflow in time?

So for us, the opportunity of pushing out and seeing what else we can do, on the flip side of that is a threat that people who do that better might eventually come into your core market.

The good news is as the incumbent with the customers and with the data sets that matter and the trust to manage those workflows already, we feel our portfolio is in a really good place.

One thing we're asking all our portfolio companies to do by the end of this year, really, is to have five to 10 AI-first products in market with their customers. That's what we've told our whole portfolio to do and we're working with them to help them do that.

Again, our size and our expertise and the ability to say to one portfolio company, well, look what's working really well here, why don't you try that and let's fast track that learning, I think that gives us a really good opportunity to help our businesses bring AI product to their customers.

Sam Benstead: Digging into the portfolio, can we get some colour on the revenue and earnings growth of the businesses that you invest in?

Luke Finch: We've got a very strongly growing high-margin portfolio. I can only talk historic numbers for you, I'm afraid, but the last 12-month (LTM) numbers for the top 20 portfolio companies in March were about 20% revenue growth and just over 20% EBITDA growth. Just over half that revenue growth was organic and the margins were 33%, I think, roughly across that top 20.

So, in software, you often talk "rule of 40" being the sort of benchmark, which is you add your organic growth and your margin, and if that's north of 40%, then you've got a very good business. You can either have a very high-growth business at zero margin, or you can have a zero percent growth business at 40 margin. We've got roughly 12% organic growth, 33% margins, a decent rule of school, and that's pretty consistent across the portfolio.

Sam Benstead: This is a private equity trust. How is the private equity industry today? Are there lots of companies coming to market and listing their shares? Or is it a bit slower than it might have been in the past?

Luke Finch: I can't talk about the whole private equity industry because obviously we're pretty focused on what we do. We don't do retail and we don't do consumer and there's large parts of the economy that we don't look at. Our bit of the market is robust, it's functioning well.

Like I said, we've had lots of exits over the last two and a half years since we met and we've succeeded on everything we've bought to market for liquidity, and we're getting outbid on things that we like on the buy side, so it's a robust environment.

I think private equity is a bottom-up industry. You can't really generalise. Some managers are doing well, some are doing poorly. In private equity, knowing what you're about and being deliberate on that is what's going to set you apart.

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Sam Benstead: Visma is one of your largest positions. I saw rumours that it might list its shares in London. Are you able to comment on this?

Luke Finch: I can't say too much about potential listing for regulatory reasons, so no comment on the listing piece, but Visma's been a part of the portfolio for HGT for a long time. It's coming up to 20 years that we've been invested in it.

It's gone from being about €400 million enterprise value when we delisted it back in 2006 to the last valuation round, when people invested in alongside us, and it was just about €20 billion. So, it's a real success story for us and for the industry as a whole.

I think and I hope that it shows that PE doesn't have to be a short-termist view. If and when we do list Visma, we'd hope it looks a bit different to other private equity IPOs over recent years.

It's a very high-quality business. It publishes its accounts quarterly, publicly, so everyone can see what that looks like and I think the investor community is very excited about a chance to potentially invest in that.

Sam Benstead: Could you just explain what Visma does? I think it's a 16% position in the portfolio.

Luke Finch: Visma started off in Norway doing SMB, so small business bookkeeping. What it's done over the years is expanded out of Norway across the Nordics and then into Benelux and now into Eastern Europe and also into Latin America. It's the king of small markets in terms of offering that kind of SMB bookkeeping.

It's also expanded its product set, so it does bookkeeping, invoicing, payroll, and other things that small businesses need. So, it's both expanded its footprint to be multi-local and its product offering to really satisfy a lot of the mid-office and back-offices of small businesses.

In the US, you've got a very large business like Intuit Inc (NASDAQ:INTU), which has the QuickBooks product set. In the UK, you might have Sage Group (The) (LSE:SGE) or Xero Ltd (ASX:XRO) for some small businesses and, really, everywhere else you've got Visma.

Sam Benstead: Is it typical that the companies you own are operating behind the scenes and actually retail might not be aware of them?

Luke Finch: Yes. I think probably one of our challenges is we might be the biggest private equity firm that no one's ever heard of because none of our businesses really touch the consumer imagination or the consumer consciousness.

If you own a bakery in Denmark, you've heard of Visma, maybe if you're a cycling fan you might have heard of Visma, it's probably the only one. Iris, which is another big company in the portfolio files a lot of UK accounts, [and] lots of accounting firms in the UK will use it. Who knows that? Unless you're an accountant in the UK, you probably haven't heard of it.

Almost all our businesses have that flavour. Specialists doing a task in an industry will know that business. They'll know it because they use it for many hours a day, but their wives and children don't know it, or their husbands and children don't know it.

Sam Benstead: Finally, the question we ask all our guests, do you personally invest in the trust?

Luke Finch: I do. Obviously as a partner at HG I have to and want to put a lot of money into our funds themselves, so we call that the kind of general partner commit and I do that because I don't pay fees and carry on that, so most of my money goes in that way. But obviously the beauty of the trust is that I can put it in tax wrappers, so SIPP and ISAs and things like that.

My kids, they're probably too young to understand it, but I'm actually trying the experiment with them on the ISA long-term return, so I'm putting their Junior ISAs (JISAs) into it. So, we'll see where they end up after 18 years of compounding.

Sam Benstead: Luke, thanks very much for coming into the studio.

Luke Finch: Pleasure, thanks for having me.

Sam Benstead: And that's all we've got time for today. You can check out more Insider Interviews on our YouTube channel where you can like, comment, and subscribe. See you next time.