After selling four healthcare-related companies, the cofounder of a venture capital firm's healthcare efforts shares a bit of his strategic perspective.
This excerpt was first published Thursday, February 28, 2019, by Buyouts Insider's PE Hub Healthcare Wire, a sibling publication to HealthLeaders.
By Sarah Pringle
I'll be stopping by ACG's healthcare conference in New York City on Thursday night. If you're attending and catch me bourbon-tasting at the reception, come say hello!
One of the speakers is Andrew Adams, Oak HC/FT, cofounder and head of the firm's healthcare efforts. Coincidentally, I just wrapped up a Q&A with Adams, who, I learned, is currently binging "Escape to River Cottage" on Amazon Prime. I had to look that one up!
Among other things, Adams explained to me how the less-than-five-year-old firm best positions its portfolio companies for sales to strategics. His firm has sold four healthcare-related companies to date.
"When you’re [investing in companies] addressing those three central elements—cost, quality, and consumer experience—that creates sustainable value," he said. "Total addressable market is an issue we never address because it's always enormous. That's one thing that is attractive to strategics: growth runway."
Adams also touched on the evolving buyer landscape, what he looks for in entrepreneurs, and how his firm keeps up with the constantly changing healthcare landscape:
"If we find a low-cost operator that we think can be successful in fee-for-service, but can make that shift to value-based care, then we're not making the bet on value-based payments. It's hard to time that. But we invest in the ones that would benefit from that trend … We're not interested in being single-threaded on one thing like one regulatory change."
Here's a bit of what those attending the JP Morgan Healthcare Conference had to say about the outlook for healthcare private equity in the year ahead.
Editor's note: This is an excerpt of an article originally published Thursday, January 10, 2019, by Buyouts Insider, a sibling publication to HealthLeaders.
By Sarah Pringle
San Francisco — For the healthcare private equity community and many other attendees, the JP Morgan Healthcare Conference is much more about all the shenanigans taking place around the Westin St. Francis, where the actual event is held, than it is about the official program.
It may be taboo for bankers to show up at competitors' conferences. JPM is the exception. Banks, law firms, and other advisory groups, large and small, stake out hotels and restaurants in the surrounding area. And there's not enough time to hit every reception each night, if that's your thing. As I write this hurriedly amidst Day 3 of networking and evening receptions, here's a bit of what I'm hearing about 2019's outlook for healthcare PE.
The deal pipeline is status-quo—especially in healthcare services. There's lots of noise around the credit markets. But it's still a great time to sell, and valuations remain strong. While pricing in the debt markets could eventually "let the air out of the valuation balloon," as one GP put it, that has yet to reduce sponsors' eagerness to transact or price expectations in the healthcare arena.
There's also no big healthcare policy overhang issue that's widespread. The possibility of ACA repeal and the Trump administration were major topics of conversation in recent years, but that's no longer the case. There's certainly vertical-specific policy issues folks are talking about. But for now, broadly, Washington is quiet.
An interesting side note: JPM week is typically a popular time for companies to unveil their blockbuster megadeals. This year in healthcare services: nada.
There were plenty of deal announcements but nothing so sizable or transformative that changes the industry landscape in a big way. Coincidence? A result of the cooling off in the public markets? (What do you think? Hit me up with thoughts at springle@buyoutsinsider.com.)
If you build it, they will come
People love to hate JPM. Or maybe it's more of a "love-hate" relationship. Either way, the crowd keeps coming back to the Bay each January to kick off the year.
That said, I did hear anecdotes throughout the week suggesting that more PE folks are opting out of JPM, questioning whether the escalating costs of hotel rooms and meeting spaces are worth the value and efficiency the event produces.
One GP told me his healthcare shop was spending $125,000 over four days to attend JPM, with rooms requiring a four-night minimum at $1,500 a night. Another GP told me he was paying $2,000 per night for a room, which also required a four-night stay.
On the other hand, others I spoke with contended that the sheer number and diversity of people attending keeps growing. Even more, JPM is increasingly less exclusive to healthcare-focused professionals. For instance, one sponsor noted that a few of his firm's generalist LPs came out to see what it's all about.
Whatever the case, JPM is always evolving. I'm still a relative newbie—2019 was only my third year attending—so I polled a bunch of sponsors this week for their takes on JPM and how it's changed in recent years.
The one thing I heard repeatedly: PE firms are no longer launching and running formal auctions at JPM the way they once did. Rather, it's all about pre-process "fireside chats" with management teams and previews of assets poised to hit the auction block later in the year.
Here's what a handful had to say about this evolution and the effectiveness of the event generally speaking, edited and paraphrased for clarity:
Sponsor A: Five years ago JPM was full of efficient kickoff meetings with bankers and lenders. A lot more sponsors were actually launching processes.
Now it's all about "fireside chats," which are so cursory. [Management teams] are not that prepped. People are now saying, "It's not that productive." It's scattered. It's superficial. Everything I learned could have been learned in 15 minutes from a teaser. You do get the flavor of management, but it's such a short amount of time and you spend 15 minutes introducing yourself.
Sponsor B: If fireside chats at JPM are done the right way, they're valuable. If you're a [management team] trying to get people up to speed on your story or a firm really trying to learn about a business, it is not enough. But it can serve as the start of a continued evolution of a relationship.
Sponsor C: I think of JPM as a mosaic. Altogether, you get your finger on the pulse of the market. It's irreplaceable to get so many peoples' views so quickly. The timing itself helps prioritize your mandates for the year and impacts the healthcare-deal calendar.
What's in vogue? Bankers are now saying, "We're not launching a process yet … but it's coming next week." It's more of a preview.
Sponsor D: I used to come to build my network. Now it's a great place to maintain my network. If you're contemplating exploring a sector or selling an asset, you can get the smartest guys to opine on it.
Fireside chats are worthless. Management teams don't take them seriously.
Sponsor E: I don't come here thinking I'm going to make my next deal. The networking aspect is better than the deal generation.
Sponsor F: I spend JPM finding retired or semiretired CEOs. My strategy is executive-oriented. We come out of it with 10 qualified board members.
Sponsor G: JPM is like a velvet rope. If you're not based in NYC, it's super valuable. It allows you to prioritize. If you are a savvy company and come to JPM, by excluding people in meetings, you raise your profile.
I'm not attending thinking I'm going to find a team I'm going to back. I'm not going to find my next platform, but maybe an add-on, or maybe I'll find something else. Human resources, person connections. That's worth it.
Sponsor H: Fireside chats? Yes, they're effective. It's a good way to network and begin a multiyear relationship that could lead to something. Sometimes it take four years of meeting folks in various ways for something to happen.
Sponsor I: Sale processes are designed to maximize an outcome. More exposure at JPM is always a good thing. As a sponsor, the exchange of info you get is minimal. But it's more facetime with a given team.
Don't Be Shy
That's it for now. Stay tuned for brewing deal activity in the weeks ahead. ICYMI, one on the horizon I learned about this week was PE-backed Hospice Compassus. Check out my story for more detail.
Which interesting emerging themes or hot auctions at JPM have you heard about? I'd love to know. Reach me at springle@buyoutsinsider.com with any tips, comments, or just to say hello.
This exerpt was edited by HealthLeaders editor Steven Porter.
Investors that entered the hospital business about a decade ago are now looking for an exit.
Private equity continues to flee from hospitals in favor of less-costly and more efficient outpatient settings of care like home health and retail healthcare specialties like dermatology and vision care, according to Sarah Pringle of Buyouts, a HealthLeaders sister publication.
Capping this theme of investors that got into the hospital biz around the 2008-2010 timeframe and are now attempting to get out, Leonard Green is evaluating the sale of Prospect Medical, Buyouts writes. The buyout firm a few years back reportedly tapped Morgan Stanley to find a buyer for the for-profit hospital operator. Find out who's advising this time around.
It's too early to predict how the process will play out, but some interesting dynamics are at play.
One is that Prospect's hospital network spans California, Texas, and the New England region. Given the tough environment, according to at least one source Buyouts spoke with, a piecemeal sale is a more likely scenario. It's also possible transactions are done in some combination with a real estate investment trust (REIT) structure, this person said.
Of the transactions that have gotten done in recent years, many have been in the context of a real estate play.
For instance, Apollo has converted some of RCCH's assets into a REIT that Medical Properties Trust owns. And there's speculation that some of the assets inherited through RCCH's pending $5.6 billion deal for LifePoint Health may take on a REIT structure given the sponsor’s success with this strategy in the past.
Other PE firms with hospital assets growing increasingly long in the tooth have taken to an REIT structure. That includes Cerberus-owned Steward Health Care, which provided an exit for TPG when it bought Iasis Healthcare in 2017 for a reported $2 billion. Cerberus has owned Steward since 2010.
Meanwhile, for-profit operators Community Health Systems and Tenet Healthcare have been ridding themselves of struggling or non-core hospitals as they look to address their debt burdens.
Prospect, for its part, also provides care-management and administrative-support services through its medical-group unit. This piece of the company could be spun off in a separate and more highly pursued transaction, one source suggested.
New PE entrants in the sector have been scarce in recent years, even as existing sponsors in the space rethink their strategies. In fact, some eager hospital sellers have even tried to bring in Asian and European investors, the source told Buyouts.
With the shakeout in durable medical equipment, the opportunity to buy higher-risk companies at single-digit multiples of Ebitda may lure buyers back in.
This story was reprinted with permission from Buyouts, which is part of the Simplify Compliance family of brands along with HealthLeaders Media. To subscribe to Sarah Pringle’s free weekly e-letter, PE Hub Healthcare Wire, click here. To see all the products offered by Buyouts Insider, go here.