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Insights on Issues & Trends that Impact Investments in Healthcare & Life Science Businesses

Healthcare & Life Sciences Private Equity Deal Tracker: GTCR Partnership Acquires Citra Health

Posted in Healthcare Services Investing

GTCR has announced its Cedar Gate Technologies management partnership with CEO David Snow has acquired Citra Health Solutions.

Citra Health, based in Morrisville, N.C., is a provider of capitation management software solutions.

GTCR, based in Chicago, pursues a wide range of investments in several industries, including healthcare. Founded in 1980, the firm prefers to make more substantial investments from a dollars perspective.

Cedar Gate Technologies, based in Greenwich, Conn., is a value-based care performance management company founded in 2014.

Terms of the acquisition were not disclosed.

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A View From the Top: David Young of Physicians Endoscopy

Posted in Healthcare Services Investing

Please see below for the latest installment of our interview series, A View From the Top. This series features interviews with C-suite leadership of private equity-backed portfolio companies. This installment features David Young of Physicians Endoscopy. To recommend a leader for a future interview, email Holly Buckley at hbuckley@mcguirewoods.com.

Q: What was the best advice you received about running a business successfully?

David Young: The best advice I have received is to make sure you spend enough time knowing and understanding your talent and knowing that you need the best talent to make yourself and your organization successful.

When you enter an organization, you have different levels of talent. You need to quickly identify your A, B and C talent. You need to set a goal to turn your Cs into Bs and your Bs into As, with a larger goal of getting As across your organization in a time frame that you set for yourself. If you understand and improve your talent, whether from internal development or recruitment of talent, you will give yourself and your organization the best chance of success.

As a leader, while it is critical to be thinking about strategy and operational decisions, it is extremely important to get your talent right.

Q: What characteristics do you look for in leaders within your organization?

DY: When I look for leaders, I want to find people who are humble, as they will more accurately represent their business skills, experience and knowledge, and appreciate where they may lack experience or knowledge. This allows a leader to engage in comfortable dialogues with healthcare providers. Good leaders know they do not need to have the answers to everything but will commit to getting answers. I also look for leaders who demonstrate a willingness to be transparent with their organizations, take on conflict within organizations and ultimately drive and become comfortable in making decisions.

The ability to comfortably work at 50,000 feet and then drop to two inches is important. I consider it a red flag if someone is comfortable managing from up high but uncomfortable with diving down. Healthcare is national, but most importantly, local, and you need to be able to work in real data and numbers and specific objectives rather than generalities.

Q: How has the COVID-19 pandemic shaped your planning and vision?

DY: The pandemic has forced leaders to make significant and fast changes to their organizations. For myself and others, this meant ripping up our carefully crafted business plans and understanding the need to swivel and move away from a strategy that was put together cohesively, presented to and bought in by the board and had everyone’s backing. We needed to transition rapidly to address a set of circumstances that forced us to focus on how quickly we could understand what was going on and turn this knowledge into a cohesive set of priorities that allowed our organizations to respond effectively and successfully. In addition, we needed to be able to make changes to this daily, weekly and monthly.

As a leader, you are always planning for today while building a longer-term strategy. The pandemic made us understand that our strategic window had shortened rapidly. We needed to determine how to start explaining the strategic window so we could start communicating to the organization about how we were responding tactically today and tomorrow, but also what was needed in a week’s time, a month’s time, two months’ time, etc. It is a challenge to quickly shorten your window but then also be responsible for thinking broadly — as a leader must be able to do — on how to develop a longer-term strategy when you need to get the organization focused on the now.

Leaders always need to be thinking at least a month or two out and also years out, but you do not want most people in the organization to be thinking that way during a crisis. In most cases, it is unfair to ask team members to focus on longer-term planning when so much disruption has occurred, and they need to execute on what is needed today.

Q: You have worked at a high level in various positions. How do you quickly learn the most important things about an industry/business?

DY: First, I need to understand the business model. That may sound simple, but it’s actually fairly complex. I want to learn about the key triggers and drivers of the business model, those that have made the segment a success and how the company has achieved success within the segment. I also want to gain a strong understanding of why the business model is valuable, what the value drivers are to customers, how customers view the business model and how that is changing. Unless you truly understand the business model, you cannot effectively plan the key priorities of the organization today versus the future.

To gain this clear understanding, I begin with a discussion with the leadership team and then quickly drop down a few levels across the organization to get their understanding of what is happening within their organization and how they see and understand the organization.

In addition to speaking with leadership, I read about the company’s strategy and financials; look at operating metrics, which should be helping me understand key drivers; and start to build a picture and understanding of how I should see the world in which the organization operates. I discuss my understanding with others to ensure I am using the correct terminology, which helps me refine my language.

I also move quickly across the organization and do dropdown meetings with various teams to try to understand how people within the organization view the mission and vision of the organization, how they understand what we do and how they understand what they think is bringing value. Over time, this not only helps me identify issues and priorities but also helps me understand the most important facets about the business and industry.

After doing many meetings across an organization’s entire team, a few common concerns typically emerge that are usually attributable to communication, lack of understanding of priorities, the need for process improvements, and/or training. Through these meetings, you learn about the key internal issues and challenges. This helps supplement the knowledge you have gained while focusing on understanding the external challenges.

In addition to these processes, I reach out across the industry and introduce myself. I also get introduced to people by my predecessor, the person above me, and/or the board and ask those in the industry to help me understand how they view the industry and its place in the world.

I also speak with the bankers and brokers to get their perspective of what is happening in the investment community around the industry. These organizations and people are great resources because they are always trying to predict and understand the issues and trends they are facing and how to position themselves for success. That provides me with good lessons and direction.

About David Young

David Young joined Physicians Endoscopy in June 2018 and serves as president and chief executive officer. Physicians Endoscopy specializes in supporting the GI industry through the development, investment and management of freestanding, single-specialty endoscopic ambulatory surgery centers in partnership with practicing physicians and hospitals and also in the investment and provision of management services to GI practices. Young is responsible for Physicians Endoscopy’s strategic direction, service development and day-to-day management.

Prior to joining Physicians Endoscopy, Young was chief operating officer of Privia Health, a national physician practice management and medical group based in Virginia. He helped build the group to more than 2,000 providers and was responsible for all day-to-day operations. Before Privia Health, Young was chief financial officer and interim president of Smile Brands, the largest provider of support services to general and multi-specialty dental groups in the United States. He has also served as senior vice president of operations for McKesson Specialty Health, an $8.7 billion division of McKesson Corp., and chief financial officer of US Oncology, one of the nation’s largest networks of community-based oncology providers.

To contact David Young, email dyoung@endocenters.com.

Healthcare & Life Sciences Private Equity Deal Tracker: Lightyear Makes Majority Investment in HPOne

Posted in Healthcare Services Investing

Lightyear Capital has announced that affiliated investment funds will acquire an indirect controlling stake in Health Plan One (HPOne).

HPOne, based in Trumbull, Conn., is a digital insurance broker focused on the Medicare market.

Lightyear, based in New York, is private equity firm focused on financial services in healthcare and other sectors. Founded in 2000, Lightyear prefers to make control investments in North America-based middle-market companies.

The transaction is expected to close in July 2020. Terms were not disclosed.

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Lee Equity Forms Independent Urological Services Provider

Posted in Healthcare Services Investing

Lee Equity Partners announced that it has partnered with Integrated Medical Professionals and The Urology Group to form Solaris Health, a urology management services organization.

The announcement states that Solaris becomes one of the nation’s largest independent urological services providers.

Lee Equity is a New York-based private equity firm that targets equity investments of $50 million to $100 million in middle market control buyouts and growth capital financings in companies with enterprise values of $100 million to $300 million. The firm invests in a range of industries, including healthcare services.

Integrated Medical Professionals (IMP), a clinical affiliate of The Icahn School of Medicine at Mount Sinai, is a urology-centric, multi-specialty practice in the New York Metropolitan Area

The Urology Group (TUG) is an independent group of urologists and other specialists headquartered in Cincinnati, Ohio.

Cross Keys Capital served as advisor to IMP and Provident Healthcare Partners served as advisor to TUG.

Women in PE to Know: Priya Parrish

Posted in Healthcare Services Investing

McGuireWoods has long been an avid supporter of the advancement of professional women. As part of our initiative seeking to expand the leadership of women in private equity, we are continuing our series of profiling women leaders in private equity. We are hopeful that this series will serve to inspire other women to pursue their careers in private equity in a way that best challenges and motivates them, which these impressive women have all done. We are pleased to feature Priya Parrish of Impact Engine. Access her profile by clicking here.

To recommend a woman for a future interview, email Amber Walsh at awalsh@mcguirewoods.com.

Physician Perspectives on Finding the Right Investment Partner — 6 Key Points

Posted in Healthcare Services Investing

The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference is authored by myself and my colleagues Tim Fry and Amanda Roenius.

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Physician Perspectives on Finding the Right Investment Partner — 6 Key Points

by Amber Walsh, Tim Fry, and Amanda Roenius

Physician leaders continue to seek the right investor to partner with in a transaction, according to experts who spoke on a panel titled “Physician Leadership Perspectives on PPM Business: Finding the Right Partner, Closing the Deal and Executing on Strategy” at the 17th Annual Healthcare and Life Sciences Private Equity and Finance Conference, held in Chicago on February 19 and 20, 2020.

Experts included Dr. Michael Conroy, Chief Medical Officer, Dermatologists of Central States; Dr. Peter Lafferty, Riverside Radiology; Dr. John Murphy, CEO, NavaDerm; and Dr. Michael Weinstein, Capital Digestive Care. The panel was moderated by Amber Walsh, a Partner in the Chicago office of McGuireWoods LLP and chairwoman of the firm’s healthcare department.

Private equity funds and other investors should internalize the following six key points to better approach potential target physician practices to secure their next deal:

1. Physicians feel significant pressures to grow. Each of the physician experts recognized that the healthcare industry is changing, with market forces pushing independent groups to grow. Physician practices face hospital systems—often the largest regional employers—and national third party insurance payors, which are acquiring competitive healthcare provider businesses. Meanwhile, clinically integrated network relationships, advanced payment models and population health are being forced on many independent groups and solo practitioners. Each of the panelists noted that a certain size may be necessary to address these new models appropriately. Thus, growth is necessary to achieve certain market penetration as a condition to maintain independence. These goals may necessitate financial backing and including an investor.

2. Independent physicians want autonomy. Particularly for independent groups that have valued independence (and likely rejected purchase offers from local hospital systems), most physicians fear loss of autonomy from a transaction and want to maintain past clinical schedules, clinical oversight, and aspects of their practice. While state law necessitates that physicians maintain control and oversight of patient care, investors need to reassure physician groups that they will continue to control their care protocols and provide patient care as they were trained. Many pre-letter of intent discussions focus here, and many deals include contractual covenants to ensure comfort in the post-closing period. Here, one panelist discussed how platforms formed with multiple practices can consider retaining separate brands and clinical protocols to ensure physician trust with one another and the investor partner.

3. Physicians want reduced administrative, compliance and other business costs. Although physicians desire clinical autonomy, groups are often tired of the industry’s non-patient administrative burdens, such as billing requirements and legal charge. Physicians desire investors with proven records in successfully handling and navigating these administrative burdens. Similarly, investment costs can also be a significant burden where investors can help. For example, the panelists discussed the need that often exists to expand new technologies and IT platforms. Compliance burdens, including achieving alternative payment models discussed above also, necessitate strong partners with healthcare experience. Finally, while the panel was prior to the onslaught of the 2019 novel coronavirus (COVID-19) public health emergency, the pandemic caused new costs and may drive more providers to seek partners.

4. Investors and physicians want long-term relationships. According to experts, both investors and providers alike want to enter into transactions that have a long-term relationship, with several panelists noting that a two to five year long-term relationship is critical. Investors seek such a relationship to make the deal financing work; physicians seek such a relationship to enhance their career. But, it takes time to build two-way trust. We often see providers selecting a bidder/buyer that did not offer the most money but, instead, who they believe will be the best long-term partner.

5. Clinical practice is changing, which may create new opportunities. The panel’s experts acknowledged that even five years ago, many post-resident physicians had their own practice as the goal, but, this is not the case anymore. Most new physicians want to join stable practices, including private equity or investor-backed practices for many of the reasons discussed above (e.g., ability to delegate administrative burdens). Newer doctors still want growth and partnership opportunities, but they understand the stability and support an investor-backed company can bring, particularly as they pay their student loans. Similarly, many specialties, like dermatology, are more open to using nurse practitioners and physician assistants than they were even a decade ago when physicians viewed such non-physician providers skeptically as mere cost-saving efforts, and not to enhance patient care. Such changes reinforce the need to build a relationship and for an investor to demonstrate ways to navigate these trends.

6. Sometimes building strong relationships means walking away from certain opportunities. Being the right partner for a physician group likely means declining opportunities when you may be the wrong partner. An investor is not the right fit for all physician groups. Growth for growth’s sake may saddle a platform with the wrong fit and without a strong relationship. A lack of alignment amongst providers and investors can make an acquisition undesirable, but at its worst, could harm the relationship with current providers at the platform level and harm potential future deals. Such acquisition push can thus be counterproductive, if not balanced with being the right partner.

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Petra Capital Closes Fourth Fund With $208 Million

Posted in Healthcare Services Investing

Petra Capital Partners has announced it completed fundraising on its fourth fund — Petra Growth Fund IV — with $208 million of capital available.

Founded in 1996, Petra Capital Partners provides growth capital for middle market companies. Based in Nashville, the firm targets companies with at least $10 million in revenue and positive EBITDA at the time of investment and a growth rate in excess of 20% in healthcare services and a few other sectors.

Along with its announcement concerning the fourth fund, Petra Capital announced the new fund had closed on two investments: the fund partnered with founding management and co-investors to form Three Oaks Hospice, a Dallas-based provider of hospice and palliative care services, and the fund invested in a Midwest-based provider of physical therapy clinics and worksite solutions.

Healthcare & Life Sciences Private Equity Deal Tracker: Physicians Acquire Steward Health Care From Cerberus

Posted in Healthcare Services Investing

Steward Health Care has announced it has structured a recapitalization transaction with Cerberus Capital Management. The transaction transfers controlling interest of Steward Health Care to a management group of its physicians led by Steward Health Care CEO and Founder Dr. Ralph de la Torre.

The company announced that the transaction makes Steward Health Care the largest physician-owned and operated U.S. healthcare system.

Steward Health Care is comprised of 35 community hospitals across nine states and the country of Malta. Its network also includes more than 25 urgent care facilities and 42 preferred skilled nursing facilities.

Cerberus, based in New York, is an alternative investing firm with a reported $42 billion-plus in assets across private equity, complementary credit, and real estate strategies. Founded in 1992, the firm invested in Steward Health Care in 2010 to acquire the original six hospitals of the Caritas Christi system in Massachusetts.

Following the transaction, the management group of Steward Health Care physicians will control 90% of the company and Medical Properties Trust will maintain its 10% stake.

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Orthopedics & Podiatry Investments

Posted in Healthcare Services Investing

The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference is authored by myself and my colleague Susan Barrett.

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Orthopedics & Podiatry Investments

By Susan Barrett and Holly Buckley

A transaction between a private equity fund and an orthopedic or podiatry practice can offer both parties significant value, according to experts who spoke on a panel titled “Orthopedics & Podiatry Investments” at the 17th Annual Healthcare Private Equity & Finance Conference, held in Chicago on February 19 and 20, 2020.

Experts included Andy Blankemeyer, CEO at Beacon Orthopedics, Robert Kinsella, Senior Managing Director at Kinsella Group, David Peterson, Managing Director at New MainStream Capital, and Peter Slate, Chief Business Development Officer at Healthcare Outcomes Performance Company (HOPCo). The panel was moderated by Holly Buckley, a partner in the Chicago office of McGuireWoods LLP and co-chair of the firm’s healthcare and life sciences industry team.

Here are four key points from the panel discussion:

1. Identifying physician practices with a track record of growth is of increased importance to private equity investors. Panelists noted that prospective investors should look to understand the motivations of the physicians selling their practices and should identify evidence that the physician group has the desire to grow and sustain the growth. Private equity investors should observe how physicians within a group interact with each other in the preliminary stages of a transaction to determine the cohesiveness of the group. Panelists recognized that orthopedic and podiatry transactions are slower sales processes relative to other healthcare transactions due to having to navigate the various personalities, and panelists recommended that private equity investors make a commitment to educate the physicians throughout the process to facilitate a smooth path to closing and post-closing transition.

2. Value-based care models can help align physicians with private equity investors. One challenge private equity investors universally face is how to keep physicians engaged post-transaction. If private equity investors can align the incentives of the physicians so that the physicians benefit from increased revenue and decreased expenses, that alignment can facilitate cost effective care. Additionally, if physicians feel they are receiving value from an equity perspective, they have more incentive to stay with the practice long term. By combining with a larger private-equity sponsored platform, smaller practices can gain access to the data and other intellectual property that make profitable value-based care arrangements more achievable. Many private equity investors are also utilizing a partner-track physician concept to incentivize the next generation of physicians and bolster physician recruitment.

3. Private equity investors can add significant value for orthopedic and podiatry practices. Panelists identified that private equity investors have immediate opportunities to increase productivity and generate better margins for practices by improving staffing, assisting with provider recruitment, resolving scheduling issues, and implementing physician incentives, among other things. Additionally, investors are capitalizing on the opportunities presented from the shift in volume from the inpatient to the outpatient setting. Attractive investments for private equity investors are those with the potential for additional revenue streams, such as in-network groups that provide ancillary services and have ASCs or, alternatively, groups that have the ability to add ancillary services and ASCs.

4. Despite the unique challenges for investors, orthopedics and podiatry investments remain in high demand. With respect to orthopedics, panelists predict that more physician groups will come to market as the groups become more educated on the competitive advantages of private equity transactions and value-based care. With respect to podiatry, panelists predict that there will be significant group-to-group consolidation to put a strong corporate infrastructure in place prior to selling to private equity investors.

Structuring PPM and DPM Transactions for Maximum Success: Tackling Front-End Issues

Posted in Healthcare Services Investing

The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference is authored by our colleagues Alyssa Campbell and Amanda Roenius.

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Structuring PPM and DPM Transactions for Maximum Success: Tackling Front-End Issues

By Alyssa Campbell and Amanda Roenius

In order to structure physician practice management (“PPM”) and dental practice management (“DPM”) transactions for maximum success, it is important to tackle certain key issues, such as tax planning and management team assessments, on the front end, according to experts who spoke on a panel at the 17th Annual Healthcare and Life Sciences Private Equity & Finance Conference, held in Chicago earlier this year.

Experts on the panel included Russell Bryan, Managing Director at Bailey Southwell & Co. LLC, Jon Fidler, President and Chief Executive Officer at Fidler and Associates; Gerald Thomas, Partner at McGuireWoods LLP, and Matt Wolf, Director and Senior Healthcare Analyst at RSM.

Here are several key points from the panel discussion:

1. When making a deal, considering the ongoing partnership is key. Whether a fund is considering acquisition price, compensation, or structuring, experts agree that it is imperative to consider that buyer and seller will be partners going forward. As a buyer, communication with the seller is necessary to understand historic culture and how that culture will affect integration, negotiations, and compensation expectations among the physician/dentist sellers. Determining whether the acquisition makes sense for a platform (both financially and culturally) is imperative to ensuring long-term success and bottom-line growth.

2. When preparing a letter of intent (“LOI”), some items benefit from specificity while others do not. It is important for buyers to identify certain expectations around structure (specifically with respect to whether the deal involves the purchase of assets versus equity and any known expectations for conversions). Rollover equity and known investment terms (including governance expectations) should also be included in the LOI. Further, buyers serve themselves well by setting forth compensation and non-compete terms in the LOI so as to avoid lengthy negotiations later in the process. On the other hand, other specific structuring considerations, such as go-forward benefits or the makeup of a governing board, can often be worked out in the later stages of a transaction. To the extent possible, locking in high-value negotiation items at the LOI stage minimizes negotiation time and helps prevent seller deal fatigue.

3. Looping in certain third-party specialists during the LOI phase may save time and money down the road. As noted in point 2, locking in high-value negotiation items at the LOI stage is a way to better position the transaction for success—the same is true for engaging certain specialists. For example, tax considerations can have a great impact on the structure of PPM and DPM transactions. To the extent key issues are addressed up front, buyers are likely to find themselves saving long-term time and expense by considering unique structuring considerations at the front end and including them in the LOI.

4. Physician compensation models are evolving. As competition in and consolidation of the healthcare sector continues, so too does the importance of thoughtful approaches to physician compensation models. Compensation is often key to alignment and, as such, should be explored as a front-end item. While rollover equity remains a frequently used structure, funds are looking to newer models that provide autonomy over disbursement of economics (e.g., pooled compensation) as well as incentives that draw in the younger physician pool (e.g., bonus pools). Exploring these models in the beginning will better position a transaction for success.

5. Strong executive teams foster growth and prosperity. The market for executive team members is competitive, but it’s essential that a platform’s executives are aligned with the sponsor’s vision and investment goals. Ensuring executive team buy-in from the beginning is essential for go-forward success and growing a platform. Experts encourage buyers to have transparent, upfront discussions regarding future goals at the outset of a transaction to best ensure a cohesive process and go-forward strategy.

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