Investec View: We upgraded HgCapital from Hold to Buy on a tactical basis when the shares were trading at 380p following a sharp sell-off in the software sector amid AI-related concerns (see Indiscriminate sell-off presents tactical opportunity). Our rationale was predicated on the vertically integrated nature of HGT’s portfolio companies, which are typically “mission critical” and operate in complex or highly regulated use cases. We believed this should afford incumbents more time to defend their competitive advantages and adapt to a changing landscape than a 25% share price move implied. Since then, the company has released its preliminary annual trading update. A +4.0% NAV total return in FY25 was driven by underlying operating performance, with LTM revenue and EBITDA growth of +17% and +20% respectively to 30 Nov 2025, alongside realisations at an average 25% uplift to carrying value. The Board also stated it was considering options to address the discount, including buybacks. We note that 400k shares (c.£1.8m) have been repurchased this month, while Directors have acquired 47k shares (c.£211k at current share price), demonstrating, alongside the manager, considerable skin in the game. The share price has responded positively, up 24% to yesterday’s close of 472p since 4 February. However, we previously cautioned against simply looking “across the valley”, given elevated valuations (25.5x EV/EBITDA as at 30 Sep 25 NAV) and significant leverage (7.3x net debt/EBITDA). Following the latest data release, we believe this remains the case (we estimate an implied 25.0x EV/EBITDA valuation as at 31 Dec 25), while noting that the “substantial margin of safety” of the share price discount has largely dissipated. To frame our thinking, we reference the manager’s comment that they see “typically 20-40% of the movement in public comparables flow through to the multiples used to value our portfolio companies”, against a MSCI European Software and Services index EV/EBITDA multiple contraction of 4.0x YTD. For the sake of argument, applying a 20-40% pass-through of the observed public market contraction to HGT’s portfolio, we estimate an implied NAV/share range of 498p/share to 530p/share. While this is not a direct proxy and our calculation reflects fund-level facilities as at 30 June 2025 (last disclosed), prolonged volatility in the broader software sector could constrain private market deal activity further (e.g. Apax’s withdrawal of its take-private bid for Pinewood) and increase the pass-through of public multiples beyond its typical range. Hence, while this remains a fast-moving and highly complex situation, and we continue to view this as a quality company, on balance we downgrade to Hold.