Jefferies has downgraded HgCapital Trust to "underperform" from "hold" amid mounting concerns over AI-driven market uncertainty and software sector valuation compression. The investment firm cited a potential 5%-11% net asset value decline as falling public company comparables flow through to portfolio valuations. The downgrade reflects broader market anxiety about artificial intelligence's impact on software company multiples.

Software valuations have seen significant multiple compression, with the S&P Software and Services Index declining by approximately 4.3x in EV/EBITDA terms year-to-date. The MSCI Europe Software and Services Index has fallen by 4.1x. Jefferies estimates that 20%-40% of movements in public company comparables typically flow through to portfolio company valuations, suggesting 0.8x-1.7x of multiple compression is due to be reflected in first-quarter NAV.

The analysts expressed particular concern about HgCapital Trust's capital structure, which features multiple layers of gearing. The fund maintains a £375 million revolving credit facility with £32 million drawn, alongside £1.8 billion in investment commitments and £524.5 million in fund-level facilities. Look-through fund gearing could increase from -19% to -26% under severe de-rating scenarios, amplifying risks during periods of falling valuations.