Warburg Pincus makes 6.5x backing second-fastest growing UK start-up

The global private equity firm has sold Loyalty Management Group after backing the company five years ago when it had no revenues. The company recently won an appeal allowing it to reclaim tax in the UK on its loyalty schemes.

Warburg Pincus has made a six and a half times return on its original 35 percent investment in Loyalty Management Group, according to a source close to the deal.

Warburg Pincus said in a statement that LMG is thought to be the second fastest growing start-up company in UK corporate history after national lottery company Camelot. Warburg Pincus backed LMG as a start-up investing $38.7 million (€26.4 million) in July 2002 for a 35 percent stake, it said in a statement.

Management took the remaining 65 percent stake, Warburg Pincus’ spokeswoman said.

The business was bought by Canadian loyalty marketing company Aeroplan for £368 million (€518 million; $759.7 million), a statement said.

The business operates the UK’s Nectar scheme as well as owning the trademark for Air Miles International Trading. The company uses customer data to provide retailers and consumer packaged goods companies with information about consumer shopping trends.

Joseph Schull, a Warburg Pincus managing director, said: “This is a classic Warburg Pincus investment. We commit 65 percent of our capital in early stage investments but we are able to write a substantially larger equity cheque than most other growth capital and venture investors.”

The business succeeded because Nectar was a consolidation play on the loyalty market. By allowing various important UK retailers to participate, Schull said, “the consumer got more bang for its pound.”

From the retail perspective it was “a fraction of the cost of what an individual loyalty programme would cost.” It also allowed retailers to find out more about typical customers by discovering where else they spent their money, he said.

Aeroplan has held back £31.6 million subject to the outcome of LMG’s Value Added Tax court case which is ongoing against UK tax authority HM Revenue and Customs.

The UK Court of Appeal recently upheld a ruling in October allowing LMG to count rewards paid for Nectar schemes as supply of services for tax purposes allowing the company to reclaim VAT.

The company’s revenues grew from zero at the time of Warburg Pincus’ initial investment to $200 million in 2006 and half of UK households now have a nectar card.

The Nectar scheme has 15 members s including supermarket Sainsburys, department store Debenhams and petrol company BP.

LMG has international loyalty initiatives underway in a range of markets across Europe and Asia, the statement said.