Private Equity International – MatlinPatterson scores big in healthcare exit
By Christopher Witkowsky, March 5, 2012

The firm, co-headed by Mark Patterson, is dependent on the outcome of three large investments in its third fund, one of which, XLHealth, was sold for a 5.5x cash-on-cash return.

MatlinPatterson has recently made a significant distribution to its limited partners from its sale of XLHealth Corporation to UnitedHealth, handing over about $1.8 billion to be split up among investors in its $5 billion third fund, according to two people with knowledge of the transaction.

The distribution may be boosted by more than $200 million in additional funds, part of which is being held in escrow, according to one of the firm’s limited partners.

MatlinPatterson declined to comment.

The firm agreed to sell the company to UnitedHealth last November for a price somewhere in the range of $1.5 billion to $2 billion. The firm acquired XLHealth in 2007 for about $330 million. XLHealth creates programmes and businesses meant to improve healthcare services for Medicare beneficiaries with special needs, according to the company’s web site.

The exit has generated a 5.5x cash-on-cash return and a 53.9 percent gross internal rate of return, the people said. If the $200 million of additional funds is eventually released, the return will increase to a 6.1x cash-on-cash and a 56.6 percent.

The exit is significant for MatlinPatterson as the success of Fund III is heavily dependent on the outcome of three large investments in the fund – XLHealth, Flagstar Bancorp and homebuilder Standard Pacific. The firm’s ability to raise a fourth fund could well depend on the outcome of Fund III because its second fund has been disappointing. Fund II, which raised $1.6 billion in 2004, was generating a .63x multiple and negative 13.7 percent IRR as of 31 March.

XLHealth has been the strongest of the three investments, while Flagstar has struggled.

The firm has about $1 billion invested in Michigan-based Flagstar. The bank agreed in February to pay $133 million to settle claims that it engaged in mortgage lending fraud, forcing it to restate its fourth quarter earnings. The settlement caused the company to increase its fourth quarter net loss between $25.9 million and $34.4 million, to a total of about $70.7 million. For the full year 2011, the company reported a net loss of $177.5 million, an improvement from its 2010 net loss of $393.6 million.

The company’s share price plunged from between $6 and $7 in December 2008 and January 2009 to around 65 cents on 15 August 2011, which included a 60 percent decline in 2011. Shares were trading around 74 cents early Monday.

Homebuilder Standard Pacific is a more positive story for the firm. The company struggled in the downturn as California’s real estate market was one of the hardest hit, but has worked its way back, with its share price climbing from $2.40 on 17 August 2011 to $4.25 in early trading Monday.

The company reported net income of $15.3 million for the fourth quarter, compared to a net loss of $21.9 million in the same time period in 2010, according to the company’s filings with the US Securities and Exchange Commission.

Homebuilding revenues were up 64 percent, while net new orders came in at 615, an increase of 44 percent.

“I wouldn’t count MatlinPatterson out,” one LP told Private Equity International in an interview last year. “They’ve had some massive hits, and some big disasters. Especially in this environment, let’s see how this thing turns out.”