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IRIS lands private equity cash at £3bn valuation

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In a deal valuing the accounting software suite at a hefty £3.15bn, Leonard Green & Partners has taken a stake in IRIS Software Group, fuelling IRIS’s plans to expand its North American operations.

3rd Jan 2024
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Completed at the tail end of last year, the investment represents one of Europe’s largest software buyouts for 2023, valuing IRIS at a hefty £3.15bn. This more than doubles the group’s £1.3bn valuation cited during its previous buyout in 2018.

The deal between Los Angeles-based Leonard Green & Partners (LGP) and Hg is not a full sale – instead, the transaction will see LGP taking a ‘co-controlling stake’ in the British software business.

According to a press release accompanying the news, the investment will support IRIS in its ambition to expand its North American operations – where the group currently pulls in 25% of its total revenue. 

IRIS has reportedly been on the auction block for some time and attracted several suitors before landing on LGP. Back in mid-December, Bloomberg reported that international investment house KKR & Co. (owners of Australian software giant MYOB) were in advanced talks on a potential acquisition, with fellow investors CVC, Blackstone and EQT also in the running.

Significant growth

Founded 45 years ago as accounting software, IRIS is now one of the UK’s largest privately held software companies with more than 100,000 customers across tax, accounting, payroll, HR and education. The business currently processes around six million payslips worldwide each month, with one in six of the UK’s workforce paid by IRIS payroll tools.

In a statement, IRIS reported “significant growth over the last five years”, both organically and through acquisitions such as Taxfiler, AccountantsWorld and Practice Engine, and delivering a 20% compound annual growth rate (a common metric for investment firms looking at their returns), with revenue and earnings before interest, taxes, depreciation and amortization (EBITDA) growth moving at similar rates.

Last year saw the group focus on bolstering its Elements cloud accountancy platform, with a release in May 2023 targeting mid-tier to larger accounting firms, while at the smaller end of the scale, it recently fielded questions from AccountingWEB readers about its migration of Taxfiler subscribers to a new IRIS Elements Tax & Accounts platform.

Accelerate US ambitions

Commenting on the investment, IRIS CEO Elona Mortimer-Zhika said securing backing from LGP, alongside the continued support of Hg and ICG, “underscores IRIS’s enduring success”.  

“Our unparalleled product portfolios combined with excellent customer service have resulted in IRIS being a leader in our sectors,” said Mortimer-Zhika. “We have also expanded our country presence with a notable focus on the US, so LGP’s local expertise will be instrumental in our acceleration to a world-class transatlantic business.”

Nic Humphries, senior partner at Hg, added: “IRIS and Hg have a long history, evolving together over the past 20 years. We’re delighted to now partner alongside LGP to accelerate IRIS’s US ambitions.”

Investors shuffle the deck

The terms of the transaction were not disclosed and the deal is subject to standard regulatory clearances.

In a statement to the stock market, HgCapital Trust (the London Stock Exchange-based arm of the investment fund) said it valued its investment in IRIS Software Group at approximately £99.8m. The statement added that HgCapital Trust will receive a net distribution of around £42.1m from IRIS, having re-invested a portion of its proceeds in the business alongside other institutional clients of Hg investing through its Hg Saturn fund. 

IRIS was Hg’s first foray into the tax and accounting software sector in 2004, and Hg has remained an investor in the business ever since. In 2018, Hg’s ‘Hg6’ fund sold 100% of its holdings in IRIS to a partner fund, Hg Saturn, and the new shareholder, Intermediate Capital Group (ICG). The fund also has stakes in a variety of other accounting software providers, including Access, Bright, Caseware and Dext. 

As part of the deal, ICG will remain a minority investor in the business through a new investment.

The American dream

While IRIS has been gearing up its North American operations for some time, this latest investment may mark a substantial shift towards becoming a truly transatlantic business. 

The fact that the deal is not a full sale, and Hg sees value in a partnership with an American private equity house, indicates that the investment firm sees North America as a significant growth opportunity.

And they’re certainly not the only accounting software seekers chasing the American dream. Recent years have seen Sage acquire mid-market powerhouse Intacct, and Xero shift its strategic power base to the US. This all points to the fact that the software strategists feel there is a way of breaking Intuit’s dominance of a potentially lucrative market. 

Major developments in the accounting tech sector

Dermot Hamblin, tech consultant for accounting firms and vendors, founder of Langdon Hamblin and Advance Track sales director, called the sale a “British software success story” that could lead to major developments in the accounting tech sector.

“To secure a valuation of £3.1bn against revenue of £340m is significant, and points to the large number of subscription customers on IRIS’s books and a relatively low rate of customer turnover – something investors are always keen on,” said Hamblin.

“Having more than doubled the company’s valuation over the past five years, there will no doubt be pressure on the IRIS team to repeat the feat. However, getting to £6bn will be no small task, and while there’s plenty of upside in North America, they’re also likely to need several major acquisitions, possibly even one of the large compliance players, to keep up the pace."

Replies (10)

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By FactChecker
03rd Jan 2024 11:31

2024: time to re-write the old adage ... so it's now "Fortune favours the greedy"?

Thanks (4)
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By Open all hours
03rd Jan 2024 12:39

My feelings about Iris are unsuitable for publication.

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Replying to Open all hours:
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By AdamJones82
03rd Jan 2024 16:20

"Baldrick, the phrase rhymes with Clucking Bell"

Thanks (5)
By ireallyshouldknowthisbut
03rd Jan 2024 15:40

Given the 20% compound growth ambition.....this explains the absolute pounding everyone is getting in price given the high churn rate on their client base.

I hope they implode myself. They have bought up and closed/ruined too many good software products in pursuit of market dominance. Surely enough customers will just end up voting with their feet now given the outrageous fees?

One wonder at what point they will buy Taxcalc and have a more of less complete monopoly.

Thanks (6)
Replying to ireallyshouldknowthisbut:
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By AdamJones82
03rd Jan 2024 16:19

Yes I thought about moving to Taxcalc when Taxfiler got replaced by Elements, but what's the point? It's almost the only decent tax software left (HG Capital also bought out BTC Software) and won't be long before it's gobbled up

Thanks (1)
Replying to AdamJones82:
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By Blofeld
04th Jan 2024 10:32

The dreaded Private Equity strikes again...creating millionaires/billionaires and adding negligible value. No doubt based offshore, contributing nothing to the Exchequer. I have already noticed the deterioration in support from BTC aka "Bright"...
Time to retire completely?

Thanks (6)
Replying to Blofeld:
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By AdamJones82
04th Jan 2024 10:37

Also Brightpay desktop version continues to increase in price with a higher percentage than it used to before being taken over. And their new cloud version, with less functionality would cost me £1000 more! I give the desktop version one more year before it's phased out

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Replying to Blofeld:
By Nick Graves
04th Jan 2024 11:47

Indeed - there is no longer any value-added in production/creation, only in the financialisation of everything.

Another Too Big To Fail organisation is thus created.

Also Too Big To Run efficiently - it becomes infighting fiefdoms and ungovernable.

Expect the whole thing to implode sometime soonish.

Thanks (2)
Replying to ireallyshouldknowthisbut:
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By RJUnique
05th Jan 2024 01:49

I used to work for a fantastic company that had the misfortune to be acquired by Iris. It wouldn't be appropriate to go into details, but let's just say a prostate exam by Freddy Krueger would have been more preferable to staying in that business afterwards.

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Replying to RJUnique:
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By AdamJones82
05th Jan 2024 21:10

The few accounting software companies left must feel like the children in Freddy's world "I can't fall to sleep, if I do I'll be taken over by HG Capital"

Thanks (1)