Companies operating in the healthcare space often see their growth curves plateau at some point. In recent years, many have found that partnering with private equity (PE) is the best way to launch a new phase for their businesses, providing revenue opportunities as well as an exit strategy for current owners.
With PE support, health company leaders can realize more value from their businesses. PE serves not just as a source of capital but also as a strategic partner that helps the owners or founders better leverage the equity they’ve worked so hard to build.
Here are some benefits company leaders might gain from their relationships with healthcare private equity.
Owners want PE to offer an exit strategy
One of the key reasons why the owner or founder of a private business might align with a PE firm is to create an exit strategy. For example, a physician leading a group of care centers might want to transition to retirement, or a health IT executive might want to shift resources to a new start-up.
Instead of selling to a competitor or likeminded company, the owner can instead sell some or all of the business to a PE investment firm. Owners that keep a certain amount of the company’s equity and continue to invest alongside the PE fund can potentially realize a future benefit: They can cash in again later when the PE fund itself exits the investment.
Sell a little now while business is good. Sell the rest later when business is great.
Typically, a PE firm will hold the investment for about five years before its “ultimate exit” – when the PE firm finally sells the company — but the hold period varies. There are several ways the firm might approach the ultimate exit:
- Initial public offering which takes the private company public
- Strategic acquisition in which another similar organization purchases the business for a strategic advantage
- Secondary buyout in which another PE firm purchases the business
- Repurchase in which management or founders of the company buy back the equity stake from the PE investors
- Liquidation in which the business has become insolvent and assets are sold to repay debt
With plenty of PE deal activity in the healthcare space, trends indicate that it’s quite the seller’s market. In fact, 2019 was a banner year with more than 300 investment deals, and 2020’s activity generally kept pace in spite of the pandemic.
Founders and owners operating a solid business could easily see interest from multiple PE firms with capital to invest.
Owners want PE to provide growth capital
More PE funds are investing in the healthcare space overall, and trends show each of those investor groups positioning to allocate more of their capital to healthcare. Why? Because healthcare is an extremely resilient industry with excellent growth prospects.
Owners can gain access to significant capital through PE, however, investors will most often acquire a majority stake in the business.
One of the most powerful forward actions a PE firm can take is known as the buy-and-build strategy. In this case, the capital is used to fuel a deliberate plan to make multiple sequential purchases to build a portfolio with a defined scope.
For example, a PE firm might purchase a group of three treatment centers that serve families with autism spectrum disorder. That first deal – the platform deal – would be followed by a series of purchases of other centers or service providers that can be combined to gain a market advantage. The portfolio might be built purposefully to serve a large portion of a specific patient population or deliver a full continuum of care.
In the PE world overall, about 30 percent of add-on transactions are part of a bigger buy-and-build strategy comprised of at least four acquisitions.
For owners or founders, this sudden surge of capital and accelerated growth translates to a larger company that’s worth more. When the owner exits the company for good, cashing out means a bigger payoff.
Owners want PE to bring high-level expertise
Compared to other funding sources, PE firms take a more hands-on approach. Their teams might bring expertise in operational excellence, geographic expansion, or supply chain logistics, just to name a few, but the level of involvement varies.
Owners benefit from the experience of professional investors who can evaluate, redesign, and deploy an ambitious business plan that’s focused on growth. It’s not always easy for the owners who still have a stake in the business and the fund managers who are involved in enhancing value to agree on the way forward, but most will commit to a growth plan prior to closing the deal.
Remember that PE investors have a financial incentive to supercharge profitability. Their success is the partner’s success when they ultimately cash out.
Owners want PE to maintain the mission
While financial investors can seem like strange bedfellows for organizations focused on caring for the sick and vulnerable, plenty of PE firms are looking to stand out by being good corporate citizens. Particularly as PE competition increases, non-financial aspects of the business will become increasingly important to investment partners.
Social responsibility can include a range of principles from charity care to community development to improving diversity across the enterprise. It takes more than capital to build a respected, trusted brand.
Our Take: Healthcare business owners have choices when considering potential investment partners. Some owners might need to take a step back and build up their baseline value first before going the PE route. Others will find that once they’ve engaged a PE partner, that’s when the real work begins. Either way, streamlining operations, leveraging technology, and crafting an effective marketing strategy are the surest ways to invest in a more profitable future.
Ready to accelerate the growth of your healthcare portfolio companies? The Canton & Company team of experts can unlock the value you need in today’s rapidly changing healthcare market. Contact us today!