HgCapital Trust (LSE: HGT) is Britain’s second-largest listed tech company. So, with the UK desperately short of exposure to the technology sector, it might be thought that managers would be keen to invest in the £2 billion fund. But far from it. Very few UK specialist funds have any exposure at all and the shares trade on a 26% discount to net asset value (NAV).
The lack of exposure is because HgCapital Trust is an investment trust. Professional managers don’t like investing in a fund managed by someone else, even if that is a private-equity fund holding businesses they couldn’t invest in themselves. The discount is more recent – in late 2024, it was on a small premium – and reflects wider fears about the impact of AI on software companies.
HgCapital Trust’s NAVis vulnerable
HgCapital Trust’s NAV is an independently calculated valuation derived from those of comparable listed companies. If, as is usual, there is no directly comparable company, the net is thrown wider. This means that the NAV is vulnerable to sentiment towards companies that compete with its holdings, and also towards firms that may superficially appear similar, but in reality focus on a very different area of the market. So when the software shares in general fell sharply due to fears about AI, investors could see how that would affect the NAV.
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HgCapital Trust has spent the last year trying to show that even if AI is a threat to the broader sector, it is enhancing rather than threatening the outlook for its investments. This argument is supported by the numbers. HgCapital Trust’s interim report showed revenue and net cash-flow growth of 16% and 19% respectively for the portfolio over 12 months, of which 11% and 17% was organic. However, the enterprise value to earnings before interest, tax, depreciation and amortisation (EV/Ebitda) was reduced to 22.9 from 24 times, so the NAV was 4.9% lower over the period.
This valuation had been over 26 times at the end of 2024. Arguably that – and the sector average it was based on – was too high with or without the long-term threat of AI. However, at HgCapital Trust’s current share price of 393p, the look-through valuation is 17 times EV/Ebitda, falling to 14 times on the current year’s figures.
Visma’s postponed listing is bad news for HgCapital Trust’s portfolio
The bad news is that the listing of Visma – its largest holding at 12% of the portfolio – has been postponed. The good news is a steady stream of realisations at significant premiums and a series of interesting new investments. In 2026, HgCapital Trust has made three full exits, one partial exit and received realisation proceeds from four re-financings. The full exits were at an average uplift to book value of 31%, slightly above the ten-year average, so there is no sign of inflated valuations. Three new and two increased investments were announced.
HgCapital Trust has investment commitments amounting to a hefty 85% of NAV, points out Iain Scouller of brokers Canaccord, although it has the ability to opt out of any if it so chooses. It had unused debt facilities of £300 million at mid-year, but there is also debt in the investee companies and in the Hg-managed funds through which HgCapital Trust invests. So while the balance sheet looks sturdy, there is debt below the surface. This is not necessarily worrying: HGT should aim to take advantage of opportunities when valuations are depressed.
As for risks around AI, HgCapital Trust says its portfolio represents one of the largest software environments actively deploying AI at scale, driving transformation via AI. What’s more, “investors have begun to distinguish more clearly between businesses positioned to benefit from AI and those more exposed to disruption from it”, says Jim Strang, HgCapital Trust’s chair.
Far from being a victim of AI, HgCapital Trust sees itself as a beneficiary, making its shares look highly attractive. Hence the managers’ commitment to increase their 6% shareholding to 15%. Their lead should be followed.
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