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.