Matrix hits grand slam for deals, exits in 2011

Few deal doers are upbeat nowadays - they're either fretting over the state of their portfolio, or their next fund. So it is refreshing to meet one that is still partying - particularly when the exuberance is rational.

"2011 was our best year ever," says Mark Wignall, pictured and CEO of Matrix Private Equity Partners, a VCT manager. No wonder: the firm clocked up four exits that generated £42.7m in real proceeds against just £8.5m of cost. The most outstanding was AppDNA. Foresight VCT initially backed the deal and Matrix took over in 2008, giving it the lead in the exit. It was sold last October to trade buyer Citrix for $92m, £16m of which went to Matrix - a sweet 32x multiple. That transaction enabled Matrix to pay a 20p dividend to shareholders from profit gain. "Last year the prospects for selling improved, there were very hungry and very well resourced buyers."

VCT critics call the industry "the graveyard of 3i". Indeed there are a surprising number of VCTs that would struggle to stay afloat without the tax break, and many have been swallowed up by consolidators in the last two years. But a small handful deserves plaudits for achieving returns that mirror those of institutional funds. Matrix's Income & Growth VCT vintage 2007/08 boasts a net IRR of 16.9% (this includes the 30% tax break as well as a 5.5% cost of fundraising). The multiple on its most mature Income & Growth VCT (vintage 2005) is 2.2x realised.

But of course with their government tax break, VCTs are as much about plugging an equity gap as they are about generating cash. As such, Wignall's personal favourite was the sale of Digico. Matrix reaped 4.4x money when it sold the business in a £20m secondary buyout to ISIS Equity Partners last year, and it won the Queen's Award for Industry. There is more to come: Matrix retains loan stock and an 11% stake in Digico, with Matrix's deal lead Bob Henry still on the company's board.

Show me the money
As a VCT, you're under as much pressure to put money to work as you are to get it back: unlike a traditional LP fund, where you're given a five-year investment period, VCTs must put 70% of monies raised to work in qualifying assets within three years or they risk losing their handsome tax break. So it is crucial they keep investing, whatever the backdrop.
And therefore it wasn't just all eyes on exit for Matrix recently - as the case has been for so many GPs gearing up for a fundraise soon - the firm also put £18.5m to work across four new deals, including Equip Outdoors, EMaC and a bolt-on for ASL, a deal completed at the tail end of 2010 (see table). Motorclean was the fourth deal and with a £6m slug from Matrix, represented the largest single cash outlay ever for the VCT.

"2008 and 2009 were our toughest years," Wignall says. "In those two years we didn't do more than two to three deals. We just couldn't buy or sell at the right price."

"As we entered 2011, we saw the cycle change. Firstly the number of possible buyout targets increased. This was because of the entrepreneur relief of 10% was extended to values of up to £10m; this definitely made a difference. Secondly, there has been far less competition in our bit of the market in the last 18 months." As a firm whose sweet spot lies in the £2-7m equity range, it's often other lenders, rather than just other GPs, that Matrix competes with. "In the main, banks are not in our space as much anymore. Around half of the buyouts in the UK used to involve no equity, since banks were lending at such high levels. This is not the case anymore and so businesses need other sources of funding. We have finessed our model to provide blended debt and equity now - a ‘one stop shop' in our space," explains Wignall.

Team mates
Good deals imply a good team is at work, and this is certainly the case at Matrix. The firm has not lost anyone since 2006, and currently counts nine professionals on its investment side and seven on the VCT accounts. A tenth investment adviser is working closely with the firm. The biggest change to rattle Matrix's decks is its decision to practice what it preaches by splitting from Matrix Group, its parent since inception. The spin-off was the VCT's idea, likely given its excellent run of late as well as a wider desire for independence should it wish to widen its investor base in future. The firm's management buyout is due for completion on 30 June.
The one spanner in the works for the entire industry is that in April changes to VCT rules will be announced and may include a preclusion of buyouts - the darling of many VCTs, including Matrix. Fortunately, the rest of the changes are a reversion to a few years ago, when larger assets could be backed.

The future is thus bright for Matrix as well as the VCT industry in general. Says Wignall: "Last year was a good one for VCTs. Asset values made good progress despite the wider UK press and VCTs paid good dividends. We're finding good interest from retail investors and dividends are around 4-5% and tax free. The prospects for this year remain strong." The firm raised £16.2m last year and is seeking up to £21m across three funds for this April. "We hope this year will be as good."

This article is an extract from the latest Unquote" Analysis, out this week.

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• UK / Ireland
• Buyouts
• United Kingdom