Hg Fusion Private Capital Fund

Hg is the self-styled “biggest private equity firm that no one’s ever heard of”. It was ranked as the eighth-largest private equity investor in the world by PEI in 2023 and today manages c.$66 billion.

It invests exclusively in mission-critical B2B software companies in Europe and America. They provide software their clients depend on – from human resources, to regulatory compliance and tax filing – making them more resilient to the ups and downs of different economic cycles. Hg believes these companies are predictable in their earnings and their cash generation while also generating strong growth.

Hg has over 30 years of experience in European private equity, and has been applying this investment strategy for over a decade. Realised investments over that period have delivered average gross returns (IRR) of 32% per year – past performance is not a guide to future returns. 

To date, Hg has operated a number of traditional private market funds (closed-end funds) as well as managing an investment trust, HgCapital Trust, listed on the London Stock Exchange. Hg Fusion Private Capital Fund (F-0 GBP Share Class), its new semi-liquid fund – has been created to give investors the “best of both worlds”, access to Hg’s portfolio with one up-front investment and liquidity options, but without the daily volatility of the investment trust, or the 10-year lock-up and administrative burdens of a closed-end fund.

Hg Fusion targets a net return of 15-17% per annum, not guaranteed.

• Quarterly opportunity for subscriptions and redemptions (although a long-term horizon is still required)
• Minimum investment: £26,000 – you can apply online
• Next subscription deadline: 12 September 2024

The manager

Hg is a specialist European private equity firm, focused exclusively on B2B software and tech-enabled services. Over more than 20 years it has invested in over 200 companies, with realised returns from its software & services investments of 32% gross IRR. Past performance is not a guide to the future.

Today the firm has around $66 billion in funds under management, making it the world’s eighth-largest private equity firm in 2023 according to PEI and the largest specialist buyout firm in Europe. The c.50 companies currently in its portfolio employ over 100,000 staff.

Hg itself employs approximately 400 staff, including around 240 investment professionals and operational specialists with expertise in running B2B software businesses – from sales to legal and finance. The latter, together with the manager’s narrow sector focus, help Hg develop and share best practice across the portfolio. The firm is headquartered in London, with offices in Munich, Paris, New York and San Francisco. 

Hg Fusion will seek to invest across the whole range of Hg funds, so each underlying investment will have previously been approved by Hg’s Investment Committee. 

The Fusion fund’s investment decisions are overseen by a three-strong allocation board, comprising Steven Batchelor (Head of Clients), Martina Sanow (Head of Hg Wealth) and Luke Finch (Head of Client Services). They decide about Hg Fusion’s commitments to Hg’s underlying funds, direct co-investments and any secondary opportunities based on the cash position and cash flow forecasts of the fund.

Investment strategy

The Hg Fusion Private Capital Fund aims to provide investors with access to the Hg fund range through a single evergreen investment, targeting net returns of 15-17% per annum – not guaranteed. It allows investors to access companies that are already in Hg’s portfolio, as well as future deals, without the high minimum investment thresholds, drawdown-distribution model and long lock-ups required of investments directly into Hg’s closed-end funds. 

Hg targets businesses that deliver business-critical software, typically with years of accumulated intellectual property, subscription revenue models, and fragmented SME customer bases. Hg believes this type of company is more likely to be resilient and potentially deliver attractive risk-adjusted returns over the long term – not guaranteed. 

In particular, Hg seeks businesses servicing end markets it understands well, within its eight end ‘clusters’ (sub-sectors):

• Tax & Accounting
• ERP & Payroll
• Legal & Compliance
• Automation and Engineering
• Insurance
• Technology Services
• Capital Markets & Wealth Management IT 
• Healthcare IT 

The fund expects to invest primarily in Europe, with a smaller allocation to North America. Investments will be spread across Hg’s private equity buyout funds: Mercury, Genesis, Saturn, Hg’s junior debt fund, Titan, as well as co-investments directly into the underlying businesses alongside Hg funds. The three buyout funds target companies with similar characteristics, but at different stages of maturity and size, whereas the junior debt fund provides payment-in-kind debt financing to Hg’s most robust businesses.

1. Saturn: Upper mid-market buyouts (30-40% of target portfolio)

Hg’s Saturn funds aims to “scale segment leaders”, i.e. supporting already mature, predictable and profitable businesses with the potential for stable, compounding growth over the long term. They are typically at the larger end of the deals Hg would consider.

2. Genesis: Mid-market buyouts (20-30% of target portfolio)

The Genesis funds aim to “create segment leadership”, i.e. backing businesses with stable growth in their segment, and with opportunities for significant expansion in other segments. 

3. Mercury: Lower mid-market buyouts (10-20% of target portfolio)

The Mercury funds back the youngest businesses in which Hg will invest, typically high-growth, profitable, founder-led companies, with potential for significant outperformance.

4. Titan: Junior debt investments in existing Hg portfolio companies (10-15% of target portfolio)

Hg’s Titan fund range seeks to “optimise capital structures” across the existing Hg portfolio. It invests in junior debt instruments for companies held in other Hg funds (usually Saturn & Genesis), which have been third party priced by the wider debt market. The fund targets a c. 10-13% net IRR, but with a lower risk profile than a private equity investment. 

The remainder of the portfolio (5-15% of the target portfolio) will be invested into cash & cash equivalents to help manage the fund’s liquidity requirements including meeting any redemption requests.

Types of investment

The fund expects to make three types of investment:

• Primaries (60-80% of portfolio) – Primary private equity funds are newly created funds which invest capital over a period of time, typically 3 to 4 years. 
• Secondaries (5-10% of portfolio) – Secondaries are transactions where the fund acquires a stake in an existing Hg private equity fund or portfolio from an existing investor. Secondary transactions allow the fund to deploy capital faster than through primary investments. 
• Direct co-investments (10-20% of portfolio) – Direct co-investments are transactions where the fund invests directly alongside a larger investment from an another of Hg’s private equity funds. These transactions have the advantage of not incurring additional annual management fees or performance fees. 

Portfolio

Having closed its first fundraising round in late 2023, the fund now has a portfolio of assets valued at €190 million.

This includes:

• 26% invested in a secondary portfolio of mature, fully invested buyout funds – a mixture of Saturn, Genesis and Mercury funds raised in 2020 and 2017;
• a further 27% has been invested into Mercury 4, a 2023 vintage primary investment which has just started investing; 
• 31% has been invested into co-investment opportunities with further opportunities expected to arise 
• the remaining 15% is held in cash.

The breakdown of the initial portfolio (excluding cash) is given below by strategy, vintage and end market. 

Examples of portfolio holdings

The Hg Fusion Private Capital Fund, as a new fund, does not yet have a fully established portfolio. The companies in the Portfolio Examples and Performance document below therefore include some examples from previous Hg funds as well as current investments. They may not appear in the portfolio and are provided only as an indicator of the kinds of investments investors might expect – not guaranteed.

Performance

The fund recently launched, so does not have a track record. 

However, it expects to invest into a portfolio of existing and new Hg funds, as well as co-investments into Hg fund backed companies. Download the Portfolio Examples and Performance to see the performance of Hg’s previous funds, as well as the firms currently active funds. 

Tax treatment

There are no tax reliefs associated with this investment. 

Hg aims to generate the bulk of any returns via capital growth. For UK taxpayers, any realised gains should be subject to capital gains tax and any income (whether distributed or not) to income tax. Hg will publish the amount of income earned within the fund by the 31 October each year. You should report this on your self-assessment return.

Remember, tax rules can change and benefits depend on your circumstances.

Risks – important

Private equity investments are high-risk so should only form part of a balanced portfolio and you should not invest money you cannot afford to lose. 

Investments in private equity are sensitive to changes in the global economic outlook. An economic slowdown or a drop in investor confidence is likely to have an impact on the value of private market investments. There is no guarantee private markets will outperform public markets.

Private equity investments are long-term and should not be considered as readily realisable. The fund invests in companies or instruments which are denominated in currencies other than the fund’s respective currency – such investments are exposed to currency fluctuations.

Unlisted investments can be difficult to price and value. Certain investments are valued based on estimated prices and therefore subject to potentially greater pricing uncertainties than listed securities.

Redemptions are available on a quarterly basis, however, these may be limited to 5% of NAV, to manage liquidity in the fund. There is also a 2% early redemption fee for redemptions of shares held for less than 12 months.

Before investing, you must be an elective professional client of Wealth Club. You must be able to understand the fund’s strategy, characteristics and liquidity profile. You must also be comfortable with the potential for periods of illiquidity. Before you invest, please carefully read the Risks and Commitments and the offer documents, including the risk summary for Hg Fusion, to ensure you fully understand the risks. 

Charges 

A summary of the main charges for the fund is shown below: please note, any underlying investments may have additional charges. These will not be paid directly by you but will have an impact on returns. Wealth Club investors will invest using a nominee structure. This service is provided by Wealth Club’s subsidiary companies Wealth Club Asset Management Limited (authorised and regulated by the FCA) and Wealth Club Nominees Limited and is governed by the Terms and Conditions of the Wealth Club Services. Please refer to the schedule of Wealth Club charges for more detail on fees paid by investors to Wealth Club, and the Private Placement Memorandum and Key Information Document for more details on the charges. 

Deadlines and dealing process 

The fund accepts investor subscriptions and withdrawal requests once per quarter. 

Subscriptions

The next subscription deadline is 12 September 2024 (5pm, cleared funds). The minimum is £26,000. 

Redemptions 

Investors can request redemptions once per quarter. Redemptions are processed on the first dealing day of each quarter and settled between 33 and 53 business days later (33 days later for Q1 -Q3 and 53 days later for Q4). Redemption instructions must be submitted 25 business days before the next dealing day. No matching of purchase and sale orders is guaranteed, and all redemption requests are subject to fund-level limits including early redemption deductions during the first year of holding the shares.

For instance, an investor that wished to redeem units in Q3 (dealing day 1 October) would need to submit an instruction before (26 August). 

Investors will be able to submit redemption instructions by using the Wealth Club secure message portal. 

5% of NAV redemption cap 

Redemptions on any one dealing day will be limited to 5% of the fund’s Net Asset Value as at the relevant calculation day at the end of the preceding quarter. 

If redemptions are above 5% on any dealing day, these will be processed on a pro-rata basis. Investors will be informed of any redemption amount not processed on the relevant settlement date. Any redemption amount not processed on any dealing day will be deferred until the next dealing day unless cancelled by the Investor.

Our view

Hg Fusion aims to provide access to one of Europe’s largest and most successful private equity firms. 

Hg’s decades of focus on B2B software and subscription-based companies give its team a hard-to-match edge and has created a virtuous circle. Hg has become adept at identifying the key traits of what it considers a good investment: companies whose software delivers business-critical services to customers. At the same time, the best founders are happy for their companies to join the Hg portfolio.

Hg believes the result is a portfolio of companies with very attractive business models, including a high degree of recurring revenue, high margins and strong cash conversion.

As a manager, Hg has a long track record of investing in this kind of business, delivering average returns for investors of 32% per annum (gross of fees) – past performance is not a guide to the future.

Please note, the fund offers a quarterly redemption facility, with redemptions capped at 5% of the net assets per quarter. Investors should be prepared to hold the fund for the long term. 

The fund structure is an attractive feature of the fund, in our view. It provides a number of benefits to long-term investors over traditional closed-end private equity funds and private equity investment trusts. This fund could be a compelling consideration for investors looking to gain exposure to private equity – you should form your own view. 

Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.