Investment Trusts

Pandemic performers: a spotlight on Dotmatics

Learn about our coinvestment exit of scientific software company Dotmatics.
May 2021

Hamish Mair

Managing Director, Head of Private Equity, Private Equity

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Risk Disclaimer 

Capital is at risk. The value of an investment is dependent on the supply and demand for the trust’s shares rather than its underlying assets. The value of the investment will not be the same as the value of the trust’s underlying assets.

Past performance should not be seen as an indication of future performance. Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

Smaller companies carry a higher degree of risk and their value can be more sensitive to market movement; their shares may be less liquid, and performance may be more volatile.

The fund may invest in private equity funds which are not normally available to individual investors, exposing the fund to the performance, liquidity and valuation issues of these funds. Such funds typically have high minimum investment levels and may restrict or suspend redemptions or repayment to investors. The asset value of these shares and its prospects may be more difficult to assess. If markets fall, financial leverage can magnify the negative impact on performance.

The investment world was initially quite severely upset by the Covid-19 outbreak last year, with large parts of the economy shut down and most other parts badly affected. Public markets immediately reflected the huge uncertainty through large share price declines, followed by considerable volatility. Sentiment shifted towards sectors considered resilient to the constraints that lockdown was placing on business activity. Importantly for us, software and healthcare were two such sectors. Discover our story of Dotmatics – an example of an investment that benefited from this sentiment shift.

During the first phase of lockdown, there was a distinct slowdown in new deal activity in private equity, as managers prioritised coping with the pressures on their existing portfolios. There were some value opportunities created by the crisis, with company owners who were reluctant to sell in 2019 more willing to consider an exit during a hugely uncertain 2020, even at a lower price. As the year progressed, however, the quality of both the software and healthcare sectors came to the fore, and much of the demand for new investment swung towards them. And this trend has continued into 2021.

 

Spotlight on Dotmatics

In fact, this trend led to one of BMO Private Equity Trust’s most successful coinvestment exits of recent years. Coinvestment is where we invest alongside a lead investor directly into the shares of a private company. The BMO Private Equity Trust portfolio is able to invest up to 50% in coinvestments, and the current total stands at over 40%.

In November 2017, we made a coinvestment into Dotmatics, alongside the Glasgow-based venture capitalist Scottish Equity Partners (SEP). Our share of the company was a modest 6.4%. SEP had been watching Dotmatics, a software company based in Bishop Stortford, for a number of years. Originally a spin out from Merck, Dotmatics was founded in 2005, and specialises in research laboratory informatics software. It has a suite of applications delivered in a SaaS (Software as a Service) format, which are used by scientific researchers to record, monitor, analyse and share experimental data within or between laboratories involved in new pharmaceutical product development.

The increase in pharma R&D, proliferation of smaller biopharma companies, increasing data volume and complexity, and the shift to the cloud have all acted in Dotmatics’s favour. We believe its business model is very sound, with around 80% of revenue recurring year on year, very low customer churn and high cross-selling opportunities.

These attributes attracted us to the deal in 2017, but have also not escaped the notice of its wider sector. Having received a fair amount of incoming interest in the company over the last two years, SEP initiated a sale process last summer, appointing advisers and eventually seeking bids in an auction. It was a highly sought-after asset, with the winning bid from US-based Insightful Science, itself a venture capital backed company.

The net result for us was that SEP completed the sale of the company to Insightful Science in early May and despatched our proceeds of £34m. This covers our coinvestment position and the portion held through SEP’s fund. It represents 8.7x cost and an IRR of 83%. The exit also led to around a 7% uplift in the value of BMO Private Equity Trust, without taking into account the substantial progress during the hold so far – an exceptional amount for an exit for one company.

 

Good for people, not just profits

Not only has this investment done well financially, it also does a considerable amount of good. Dotmatics’s software substantially increases the efficiency of scientific research, and aids collaboration between laboratories. These collaborations in turn accelerate complex drug discovery. These are outcomes with a strong impact well beyond the financial benefits to our shareholders. And this has all happened at a time when the benefits of being able to do complex scientific research fast, efficiently and in collaboration with others has rarely been so well understood and appreciated.

BMO Private Equity Trust has a diverse portfolio, with some 40%+ of its portfolio invested in healthcare and technology, so we believe our shareholders and wider society in general should continue to benefit going forward.

Risk Disclaimer 

Capital is at risk. The value of an investment is dependent on the supply and demand for the trust’s shares rather than its underlying assets. The value of the investment will not be the same as the value of the trust’s underlying assets.

Past performance should not be seen as an indication of future performance. Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

Smaller companies carry a higher degree of risk and their value can be more sensitive to market movement; their shares may be less liquid, and performance may be more volatile.

The fund may invest in private equity funds which are not normally available to individual investors, exposing the fund to the performance, liquidity and valuation issues of these funds. Such funds typically have high minimum investment levels and may restrict or suspend redemptions or repayment to investors. The asset value of these shares and its prospects may be more difficult to assess. If markets fall, financial leverage can magnify the negative impact on performance.

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