Even as deal flow declines, there are other activities keeping transaction players busy. Hg has focused this year on high-level hires to strengthen its North American team and set the tone for a high-volume year ahead. These hires include Alan Cline, Head of North America, Partner Farouk Hussein and Operating Partner Paul Zuber, all of whom will join Hg in 2023. With roots in London, Hg opened its first US office in New York in 2019 and its second in San Francisco in 2022.
How would you describe 2023 in terms of transactions?
2023 has been a slow year for the North American software market and, of course, a difficult year for the world in general. However, this slowness of the market has been a real gift, as it has enabled me, as a new senior executive joining a successful company, to take time to adapt culturally and integrate with the existing Hg team.
More generally, as we take a long-term view of investment - supporting sustainable trends in software adoption - we looked at the global environment and decided that the best way to make a difference was to support our portfolio, listen to our customers' needs and be patient with new implementations.
This meant helping companies with operational initiatives and complementary acquisition opportunities, while also providing a solid return of capital to our investors from exits and other liquidity events. We are particularly pleased to have distributed around $2 billion to our clients since the start of 2023, and to have completed an average of one transaction per month over the past two years. This record, in a difficult market environment, testifies to the resilience and strength of our portfolio.
On a personal level, it's been quite a busy year for me. I've been dusting off the cobwebs of my "semi-retirement" after taking a break from my former company [Vista Equity Partners], where I'd spent 20 years at the heart of software investments. I'm very grateful to have joined such an incredible company. We are in a unique position in the US software market as we enter 2024.
You have recruited senior executive staff for the North American team. What is your plan with these recruitments?
Our vision for North America is clear: to create a franchise that complements our unique strength in Europe. We have an excellent team in place today and are looking to add some talented leaders next year to achieve this goal.
Over the past three decades, Hg has achieved around three times as much software transaction activity as our nearest competitors in Europe. And more than two-thirds of our portfolio companies operate on both sides of the Atlantic. This gives us a considerable advantage, as growing software businesses in Europe can be even more challenging than in the US due to the region's multitude of languages and cultures.
These transatlantic capabilities are significant - while our competitors may boast a satellite office in London or elsewhere, this pales in comparison to what our 300+ European colleagues can offer for the benefit of our portfolio companies.
With this leadership position, cultural diversity and expertise, we are uniquely positioned to help our companies in North America develop their European presence, while helping European-based companies grow in the US. So, if a company has ambitions to serve customers on both continents, then we hope to be their preferred investment partner.
What is your vision of generative artificial intelligence?
For the past 20 years, Hg 's investment strategy has focused on a global and enduring trend: the increasing use of technology by companies to automate their business processes and workflows.
Think time-consuming, detailed tasks such as tax administration, payroll management, staff allocation, managing legal agreements or sharing healthcare data between providers - technology boosts productivity and helps manage information and risk more accurately.
Artificial intelligence takes this impact to a whole new level. We see opportunities for our companies to harness the power of AI for both customer-facing applications and internal productivity opportunities - especially in coding, customer support and marketing.
Hg is well positioned to take advantage of these developments. Over the past decade or so, we've built up a team of in-house experts who specialize in using data science and AI to drive value-creation initiatives across our portfolio, as well as within Hg. They have implemented this leverage with considerable success, leading us to develop our own suite of proprietary AI tools that we call Retina to make this technology even more accessible for our portfolio companies.
These AI-powered SaaS tools essentially distill all of our accumulated intellectual property from a decade of data and AI work within our portfolio. They cover the delivery of rich, automated business intelligence to our CEOs and boards, enhancing lead generation and stimulating deal sourcing. We believe that the AI revolution is real and will have a widespread impact in the decades to come.
Which sectors offer the best opportunities for Hg ?
That's an easy question, because our strategy over the last two decades has been very much focused on B2B vertical application software. We believe that this sector still has a long period of opportunity ahead of it. With this in mind, in North America we certainly see opportunities in a number of areas, including financial services, healthcare, payroll, vertical ERP, legal, regulatory and compliance, and of course, our robust tax and accounting segment. These are the areas where we have a long and productive history of partnering with dozens of sustainable businesses, and we continue to see strong opportunities for Hg across all three funds.
How do you see the North American market compared with Europe, where Hg is headquartered?
The North American market tends to be ahead of Europe on a number of fronts, and there's a great advantage for our European teams in exploiting what we see here. On the transaction front, Europe tends to be more relational, and this culture generally plays well here in North America. This means we're willing to invest time in getting to know founders and CEOs well in advance of a transaction - something that benefits everyone!
What are you most looking forward to in 2024? How is your team preparing for the year ahead?
We are optimistic and ready for a solid 2024. We anticipate more investment opportunities than in 2023, and are seeing an increase in activity here in the fourth quarter. To this end, we are focusing our efforts on proactive interaction with the best companies in our target market segments, in the hope of demonstrating why we are an ideal partner for them.
We continue to invest in all areas of the business - investment teams, internal operations, our executive chairmanship program and our portfolio teams. Our ultimate goal is to have a strong transatlantic presence, strengthen our sector expertise, enhance our leadership-centric engagement model, where the CEO, their team and our executive chairmen are at the heart of what we do, and support our businesses with a leading value creation team.
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