HgCapital Trust

What does a CFO need? Let's build a portfolio of that.

Author

simon severino
January 12, 2025

What does a CFO need? Accounting, Tax, Treasury, Compliance

In a recent Far From the Finishing Post podcast episode, HgCapital Trust's Chairman Jim Strang revealed insights into how the firm has built significant competitive advantages in the B2B software investment space: “We asked ourselves, what does a CFO need? Accounting, Tax, Treasury, Compliance. Ok, let’s build a portfolio of that”. Boom.

The Power of Specialization

HgCapital Trust's most significant competitive advantage stems from its laser focus on B2B software companies. Unlike generalist investors, HgCapital has developed deep expertise in this sector, allowing them to:

  1. Identify promising companies with precision

  2. Understand complex business models thoroughly

  3. Make faster, more informed investment decisions

  4. Add tangible operational value post-investment

Strategic Advantages in Deal Flow

The firm's reputation as a software specialist has created a virtuous cycle:

  • Entrepreneurs actively seek HgCapital as a preferred partner

  • The firm sees a high percentage of deals before they go to market

  • Strong relationships with founders lead to proprietary deal flow

  • Past successes attract new opportunities

Capital Structure Control

One of HgCapital's key strategies, as highlighted by Strang, is maintaining control over the capital structure of their investments. This approach provides:

  • Greater flexibility in financing

  • Ability to weather market turbulence

  • Enhanced returns through optimal capital deployment

  • Reduced dependency on external financing sources

The Growth Model

HgCapital's typical investment exhibits several characteristics:

  • High recurring revenue

  • Strong customer retention

  • Scalable technology platforms

  • Significant market expansion potential

  • Clear path to operational improvements

Operational Excellence Framework

The firm has developed a systematic approach to driving value:

  • Standardized operational improvement playbook

  • Dedicated portfolio management team

  • Focus on sales efficiency and customer success

  • Technology stack optimization

  • Cross-portfolio knowledge sharing

US Market Expansion

HgCapital's expansion into the US market represents a significant growth opportunity:

  • Larger addressable market

  • Higher valuations for successful exits

  • Access to additional tech talent

  • Cross-border expansion opportunities for portfolio companies

Valuation Approach in Current Market

In the current higher interest rate environment, HgCapital's approach to valuation demonstrates prudence:

  • Focus on fundamental value drivers

  • Conservative growth assumptions

  • Emphasis on cash flow generation

  • Multiple compression factored into exit scenarios

Investment Implications

For investors considering HgCapital Trust, several factors support a positive outlook:

  1. Defensive Characteristics:

  • B2B software's resilient business models

  • High recurring revenue in portfolio companies

  • Strong cash flow generation

  1. Growth Potential:

  • Continued digital transformation trends

  • Geographic expansion opportunities

  • Cross-selling within existing customer bases

  1. Market Position:

  • Leading position in European software investing

  • Growing presence in US market

  • Strong deal flow pipeline

Risk Considerations

Key risks to consider include:

  • Interest rate sensitivity

  • Technology sector valuations

  • Competition from other specialists

  • Execution risk in US expansion

Conclusion

HgCapital Trust's specialized approach to B2B software investing has created significant competitive advantages and a strong market position. The firm's systematic approach to value creation, combined with its deep sector expertise, positions it well for continued success despite market challenges.

The current market environment, while presenting challenges, may offer opportunities for disciplined investors like HgCapital to acquire quality assets at more attractive valuations. For investors seeking exposure to the software sector through an experienced specialist investor, HgCapital Trust presents an interesting opportunity.

Note: This analysis is based on public information and should not be considered as investment advice. Investors should conduct their own due diligence before making investment decisions.

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