McGuireWoods is undertaking a year-long effort to profile up-and-coming women leaders in private equity. This new profile series complements our existing Women Leaders in Private Equity profile series, which will continue throughout 2019. For this profile, we are pleased to feature Melinda Baglio of CleanCapital. Access her profile.
To recommend a rising star for a future interview, email Amber Walsh at awalsh@mcguirewoods.com.
The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference focuses on the senior lending market. It is authored by Jamie Levin, Gregory Barr and Raj Natarajan.
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By Jamie Levin, Gregory Barr and Raj Natarajan
The healthcare senior lending market remains very active, according to experts who spoke on a panel at the 16th Annual Healthcare and Life Sciences Private Equity and Finance Conference in Chicago on February 20 and 21. The experts provided a nuanced look at the market, pointing to exciting opportunities, while also making note of challenges.
Experts included Gregory Browne, Managing Director of Ally Corporate Finance, Jae Lee, Director of Bank of America, Adam Willis, Managing Director, Head of Healthcare of Madison Capital Funding, and Michael Young, Managing Director of CIT Group. Raj Natarajan, a McGuireWoods LLP partner moderated the panel.
Here are five key points from the panel discussion.
1. There continues to be an abundance of capital in the healthcare market in early 2019. The increase in capital deployment and growing competition among debt providers lead to a downward shift in deal size in 2018. Although deal terms were as aggressive as the market has seen, the number of deals remained high with a greater focus on hold size. More institutions are building stronger, deeper relationships with fewer sponsors, with some turning to non-sponsor and corporate opportunities. Due to the abundance of capital in the healthcare space, a bull market is predicted for the next few years.
2. Investors have continued to focus on highly fragmented areas within the healthcare market that provide opportunities for roll-ups. Physician practice management companies remain attractive and have continued to experience consistent growth in 2018, accounting for roughly one-quarter of the healthcare private equity deals according to the panelists. Investments in healthcare IT, veterinary, behavioral health, home health, hospice, autism, and health and life sciences companies have increased and are expected to grow in 2019. A panelist also noted that traditional, brick-and-mortar healthcare spaces (including senior housing and long-term care) can continue to provide attractive opportunities, due to demographic trends.
3. Capital is neither permanent nor monolithic. Each transaction is unique and it is important not only to consider the amount of capital, but the type of capital. Stability, certainty and flexibility are important qualities to consider when choosing a strategic partner.
4. Pressure on pricing and capital has driven the market. EBITDA is now seen as a proxy for purchase price and what the business can theoretically generate, rather than merely a proxy for cash flow. However, this pricing structure does not always materialize. There was some concern about trending increase in defaults given increased pressure on leverage, broad definitions of EBITDA and more diverse capital structures.
5. Due to the competitive nature of the healthcare market, diversity within portfolios are decreasing and greater hold sizes are becoming more attractive to investors. Lenders have had to become more aggressive in their underwriting, and sponsors continue to want the simplest financing solution that often results in single-lender or unitranche transactions.
Primus Capital has made a growth investment in Harmony Healthcare IT (HHIT), according to a news release.
HHIT, based in South Bend, Ind., is a provider of data extraction, migration and archival solutions.
Primus Capital, founded in 1984 and with offices in Cleveland and Atlanta, is a growth-oriented private equity firm focused on investing in healthcare and other sectors.
The investment will be used to further support HHIT’s flagship product, HealthData Archiver, and other services, according to the release.
Financial terms were not disclosed.
The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference focuses on the growing importance of female leadership in healthcare private equity. Joining me in authoring the post are Leah Eubanks and Holly Buckley.
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By Leah Eubanks, Holly Buckley and Amber Walsh
Gender diversity in leadership positions at both the private equity and portfolio company levels is becoming increasingly important in the healthcare sector according to experts who spoke on a panel at the Annual Healthcare and Life Sciences Private Equity and Finance Conference in Chicago on February 20 and 21.
Experts included Ruta Laukian, Managing Partner at Gray Bella Capital, Monica Mehta, Managing Principal at Seventh Capital, Susan McClanahan, Chief Clinical Officer at Eating Recovery Center and President and Founder at Insight Behavioral Centers, and Jocelyn Stanley, Partner at New Harbor Capital. Amber Walsh, a partner at McGuireWoodsLLP, moderated the panel.
Here are five key points from the panel discussion.
1. The discussion on female leadership in private equity and private equity-backed healthcare companies is timely because the investors, advisors and decision-makers at the top level in this space are predominantly men, yet eighty percent of those that are directing the dollars at the customer level are women. Healthcare is the most female-dominated sector in the employment space in the U.S. economy with, according to one panelist, women representing eighty percent of employees in health and social care, especially in areas such as physical, speech and occupational therapy, veterinary medicine, and behavioral health. One panelist stated that, in areas that are male-dominated today, such as dermatology, women’s health, and ophthalmology, the residents in these areas are now predominantly female. This matters to investors because the disconnect between those directing the dollars and those providing the care, on one hand, and the investors, executives and decision-makers at the top, on the other, can end in a miscalculation of investment dollars.
2. The people in leadership and board positions are increasingly disconnected from those that work for them. According to one panelist, sixty percent of boards do not have a woman on them, and, in general, for those boards that do have women, the women are sometimes viewed as token diversity board members. There is a huge struggle to fix this issue because, with respect to professional sectors where women tend to reach higher ranks, such as human resources and the law, these areas are not typically designated board seats. Board seats tend to be given to individuals with industry or CEO experience or those with geographic and strategic expertise, where women have not historically enjoyed strong representation.
3. Limited partners and pension funds are starting look more positively on teams that are diverse, and some are only investing in businesses demonstrating diverse leadership. Diversity is increasingly more important in fund-raising discussions, and in a handful of states, the authorities in such states are requiring pension funds to report about gender diversity. State institutions are then using such criteria when making investment decisions for their various pensions. It increasingly makes financial sense for decision-makers at companies and private equity funds to have diversity in company leadership in order to tap into these pension funds.
4. For private wealth and next generation wealth experts, impact investing is a major topic. Millennials and females that hold high levels of wealth are very focused on making sure their investments align with their interests and the issues that are important to them, and diversity in both the ethnic and gender categories is important to them.
5. An interesting side effect of type A women leaving the workplace and raising children is the innovation and problem-solving activities they engage in, especially in the health care sector. For example. women who are searching for certain services for their children and are not finding such services are solving problems for themselves by creating businesses to fill these needs. As one panelist said, there is no glass ceiling when you build the house.
The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference focuses on trends that are increasingly disrupting healthcare. It is authored by Cindy Lu and Holly Buckley.
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By Cindy Lu and Holly Buckley
There are opportunities for investment in artificial intelligence, machine learning, and blockchain, according to experts who spoke on a panel at the Annual Healthcare and Life Sciences Private Equity & Finance Conference in Chicago on February 20.
Experts included Brian Brownschidle – Executive Director at XMS Capital Partners; Rachel Jenkins – Principal at Avascent; and Jay Schulman – Principal & National Leader, Blockchain, Cryptocurrencies, and Security at RSM US LLP (Moderator).
Here are five key points from the panel discussion:
1. A quick primer on the buzzwords. Artificial intelligence (AI) is a computer-based bot that is able to perform tasks that humans normally perform, such as pick up the telephone or process claims. Machine learning, a subset of AI, is the idea that computers, bots, and systems can analyze data, identify patterns, and learn over time how to improve performance with minimal human instruction. One application of machine learning is looking for fraud in processing insurance claims. Finally, blockchain is a distributed ledger on an open network that can record transactions between parties, where the record and ledger cannot be edited or deleted.
2. This technology may be used in a variety of industries. The experts discussed insurance claims processing as an ideal application for AI and machine learning. The average time for the Social Security Administration to process disability claims to decision is 90 days. Using machine learning, or an algorithm that supports human decision-making, can reduce that time – a meaningful difference to someone waiting for his or her claim to be finalized. Radiology is another example of a profession that benefits from these technologies. Diagnostic imaging is a repetitive process for which the human eye is not an expert. A machine can diagnose images by learning from millions of historic cases, which can reduce costs and errors. The technology can also help reduce the time it takes for physician credentialing, which often takes between 6 weeks to 4 months.
3. When evaluating potential investments, investors should focus on technology that is solving a problem. The company developing the technology must understand the underlying processes by which the problem may be solved and possess the expertise to solve it. If the company does not understand the process, the technology likely will not work correctly to solve the problem. Investors will also want to see successful implementation in a smaller setting and confirm that the technology can be scaled.
4. There are two models forcing innovation and participation in this space. First is the iron fist model, whereby companies such as Walmart come into the space and force its vendors to follow suit. The second is an incentive-based model, whereby like-minded groups come together to develop a product after recognizing a need and an opportunity for return on investment.
5. There are risks inherent in technology investments in this space. A large risk area is related to the technology itself. Users must be able to trust the technology to inform decisions. Accordingly, quality of the underlying data must be impeccable, representative, and unbiased. Using AI on bad data brings bad results. Similarly, the technology should also be created in an environment that follows the same rules as its future marketed user. For example, if the technology is created in an unregulated environment, it may not translate to a regulated environment with dissimilar rules, such as health care.
The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference focuses on some critical points private placement memorandum (PPM) investors should know before investing in ancillary services. It is authored by Chris DeGrande and Leah Eubanks.
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By Chris DeGrande and Leah Eubanks
Ancillary services that provide additional value to patients such as ASCs, labs, physical therapy, and imaging, among others, continue to be a valuable way for PPM investors to obtain additional return on their investments, according to experts who spoke at the 16th Annual Healthcare and Life Sciences Private Equity and Finance Conference on February 20, 2019.
Experts included: Stuart Bernsen, Chief Executive Officer of TVG – Medulla LLC; Jason Mangus, Vice President of United Surgical Partners International, Inc., and JC Miller, Senior Associate of Bow River Capital. The panel was moderated by Jason Greis, a Partner at McGuireWoods LLP.
Here are five key points from the panel discussion:
1. The experts noted several potential areas of ancillary investment for PPM businesses including: ambulatory surgery center (ASC) ownership, laboratory services, physical therapy services, imaging, and durable medical equipment (DME). These ancillaries all have unique considerations for investors. For example, the experts noted that ASCs are an area the government has focused its attention with respect to fraud and abuse; therefore, the ownership and associated financial terms of investment should be carefully structured. Also, while DME can be an appealing investment, there are significant regulatory compliance issues to understand with regards to DME relationships.
2. A key point of focus for PPM businesses when deciding whether to invest in ancillaries is how such ancillaries compliment patient care and convenience. Ancillaries that a patient needs in order to complete his or her episode of care, provide value to the patient and are generally strong ancillary investments. Conversely, adding an ancillary investment solely as a method of “upselling” a patient should be avoided.
3. Investors should understand the volume of a provider’s revenue generated by ancillary services. If there appears to be a disproportionately high amount of revenue generated from ancillaries, it is important to ask why this may be the case and take proper steps to ensure the ancillary business is in compliance with applicable laws and regulations before investing.
4. The experts anticipate that certain PPM sectors, where ancillary services are a significant part of the revenue mix, will experience healthy levels of investment, including, oncology, urology and podiatry. The experts also anticipate opportunities for investment in ancillary services that will vertically consolidate patient care, meaning those services that helped to capture and manage a patient’s care through the entirety of a patient episode.
5. Investors looking to invest in ancillary services should analyze the provider’s patient base and study the current and anticipated future patient makeup in order to determine which ancillary services may prove most beneficial for patients. In addition, investors must be mindful of certain legal and regulatory issues, including compliance with the “in-office ancillary services” exception to the federal Stark law, which prohibits physician self-referral. Investors should obtain proper advice and legal counsel regarding these types of issues.
The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference focuses on how investors should assess litigation and regulatory issues in provider services transactions. It is authored by Alan Chen and David Pivnick.
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By Alan Chen and David Pivnick
Sensitivities and new areas of focus by the government make strong compliance programs and transaction-level protections crucial for buyers in the healthcare industry, according to experts who spoke on a panel at the Annual Healthcare and Life Sciences Private Equity & Finance Conference in Chicago on February 21 and 22. David Pivnick, a partner in the Business & Securities Litigation group at McGuireWoods LLP, moderated a panel entitled “Best Practices for Investors Assessing Litigation and Regulatory Issues in Provider Services Transactions.” The panel drew strong interest and was led by Kara Coen, Director and Assistant General Counsel at Capital One Healthcare, and Matt Logan, General Counsel at Practice Velocity, LLC.
Here are five key points from the panel discussion:
1. The government has dedicated increased resources to regulating the healthcare and life sciences industry. President Trump’s administration has increased expenditures on enforcement, and particularly those that target pharmaceutical companies, healthcare providers, and others involved in the inappropriate distribution of drugs. Collaboration between federal agencies has increased and the use of data analytics by the Drug Enforcement Agency (DEA) has amplified the effectiveness of such collaborations. Such efforts in government cooperation at times involve collaborations amongst over ten agencies, and include non-enforcement government entities like the United States Postal Service (USPS).
2. In response to such trends, buyers should put in place transaction-level protections. Strong compliance programs put buyers in the best position to succeed even in the face of whistleblowers. Practically speaking, this translates into shifting how diligence is performed. In an effort to pick up on additional exposure that would not fall under historical malpractice, buyers should look carefully at target companies and their cultures. What message is the target company giving to its employees? Is compliance just lip service and a matter of checking the box, or is there an active effort to drive a message of personal responsibility? How are employees trained? What is the turnover rate?
3. Buyers should also revisit how they approach transaction documents. Representations and warranties cannot be limited to purely financial items. Special indemnity clauses can be useful if there are known issues, particularly those of known quantities. In addition, cyber liability insurance is increasingly recommended given data privacy breaches, many of which have been publicized in the mass media.
4. Once transactions close, transparency continues to be an area of emphasis. Credit agreements usually obligate borrowers to notify lenders of issues, oftentimes within a specified time period. Such post-closing obligations are generally precise both in what issues require notification, and the manner of notification called for. Certain best practices, such as using certified professional coders to perform audits and implementing routine OIG exclusion checks are signals of strong compliance programs.
5. Comprehensive plans should be put in place post-close. The panelists recommended offsite trainings that focus on topics beyond operations and stress personal accountability. McGuireWoods LLP’s focus on helping clients design such plans begin pre-closing, allowing for decreased areas of vulnerability for clients. Such plans help replace toxic work environments with ones that increase the possibility of success for clients and also keep businesses from being exposed to potential litigation and regulatory issues.
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. This month we are pleased to feature Shoshana Vernick of Sterling Partners. Access her profile by clicking here.
To recommend a woman for a future interview, email Amber Walsh at awalsh@mcguirewoods.com.
The first in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference focuses gastroenterology, urology and men’s health trends. It is authored by Kerri Zelensek and Tom Zahn.
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By Kerri Zelensek and Tom Zahn
Gastroenterology, urology and men’s mealth will continue to be active in the year ahead, according to experts who spoke on a panel at the 16th Annual Healthcare and Life Sciences Private Equity and Finance Conference on February 20 and 21 in Chicago.
Experts included Bill Britton, Managing Director of Cross Keys Capital, Luke Mitchell, Managing Director of Edgemont Capital Partners, Edward Sohn, Vice President of Waud Capital Partners and David Young, President of Physicians Endoscopy Center.
Here are five key points from the panel discussion.
1. The panelists agreed that gastroenterology, urology and men’s health will continue to be active in the market in the upcoming year, despite the fact that many of the nation’s largest gastroenterology groups and some large urology groups have already or are currently participating in market transactions.
2. Market fragmentation varies by specialty and will impact opportunity and strategy. Gastroenterology is a highly fragmented market. Many gastroenterologists are independent, and one panelist noted that in approximately 24 states there are no gastroenterology practices with over 20 physicians. There is still opportunity to invest in large groups, to serve small groups in a role as manager or to add-on or combine small groups; however, add-ons or combinations may be more challenging within this specialty because gastroenterologists tend to be accustomed to independence. By contrast, there are many large and medium sized urology practices across the nation. A few of these practices are currently working on transactions, while others are interested but waiting to see what happens in the transactions that are in process. One panelist noted that urologists from different practices often know one another from participation in industry organizations and past lobbying and advocacy activities. Therefore, add-ons or combinations may be easier to close in this specialty.
3. Multiples vary based on the infrastructure and sophistication of the practice and based on the nature of the transaction. Panelists noted that they have experienced multiplies in the low teens or high single digits for platform deals where a practice has a solid internal infrastructure. Multiples will likely be lower for add-on deals and/or deals where a practice does not have a solid infrastructure in place. Investors will consider not only the cost, but also the time it will take to strengthen a practice’s infrastructure in pricing a transaction.
4. The ability to commercialize ancillaries is a key part of these specialties. In these specialties in particular, there is wide availability of ancillaries that, when structured correctly, can be both lucrative from an investment standpoint and beneficial to the physicians’ practices. Panelists noted, however, that these ancillaries often have legally complex structures and take time and money to put into place.
5. Transparency within a practice and physician leadership are key. Panelists noted that there should be an agreed upon, transparent formula for physician compensation in place before a practice comes to market. This helps prevent internal arguments among physician partners during the transaction process. Large practices also need strong physician leadership to guide the practice through a transaction, bring the physician partners together, represent the physicians’ interests in negotiations and help physician partners make decisions.
We were pleased to have terrific attendance at our annual Healthcare & Life Sciences Private Equity and Lending Conference. The deep-dive discussions into various sectors, and on the industry and deal-making generally, were extensive and produced interesting discussion.
Over the course of the next few weeks, we will be publishing a series of posts coordinated by our colleagues Holly Buckley and Leah Eubanks with key takeaways from various conference panels. Before we begin sharing those posts, this first piece provides five key takeaways on the industry and deal-making generally, based on candid discussions between speakers and attendees.
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The premier two-day conference, held February 20-21, provided content-rich programming that explored new ways to successfully close transactions and achieve growth with healthcare companies, lending institutions and private equity firms.
This year, keynote speakers James Carville and Ari Fleischer discussed governmental policies and administration affecting the healthcare industry. Monica Mehta, Managing Principal of Seventh Capital, joined attendees on day two as speaker for the Women in Private Equity and Finance Networking Breakfast as well as presenting the lunch keynote and serving as a key panelist in a discussion spotlighting the growth of women in private equity investments.
The conference drew registration of more than 850 professionals from private equity funds, senior and mezzanine lenders and investment banks, alongside the vast array of C-level executives, consultants and principals in the healthcare and life sciences industries. The event continues to deliver as one of the best networking conferences of its kind. The deep-dive discussions into various sectors, and on the industry and deal-making generally, were extensive and produced interesting discussions across the board.
Following are some key takeaways from the conference:
1. Senior and junior lenders noted that debt capital continues to be readily available, with predictions that the bullish approach would continue for at least the next two to three years. Lenders noted that they were often going outside their comfort zone into higher leveraged structures, with fewer covenants, to deploy capital. Many discussed changing their “strike zone,” looking at companies with lower EBITDA and beyond traditional healthcare providers to health IT, pharma and medical device. Several noted that, while the amount of capital available was at some of its highest levels, appropriate target companies/borrowers were harder to find. But consensus remains that 2019 should yield some of the highest returns for healthcare/life sciences debt investment.
2. Over the past several years, there has been a renewed discussion about the dearth of women in private equity firms and a new energy for making change. The conference continued and elevated this discussion through a keynote event, “The Growth of Female Founders, Company Executives & Private Equity Leadership in Healthcare Private Equity Investments,” as well as at the lively Women in Private Equity and Finance Networking Breakfast. Private equity firms recognize that in the shifting landscape of new limited partner players, evolving target company leadership and focus, and a shifting role of women generally in the U.S. economy, long-term success hinges on the recruitment, advancement and retention of women in private equity.
3. Physician alignment continues to be an area of focus for private equity-backed platforms. During various panels, experts discussed a range of equity strategies, cultural improvements and governance strategies to align physician and platform successes. They noted that market compensation for various specialties typically falls within a narrow band, such that platforms need these other alignment strategies to succeed. An alignment focus may be a key differentiator in this investment push, as compared to the 1990s failure of some physician practice management companies, where the trend was more focused on reducing compensation to grow EBITDA. This focus may provide more long-term successes for these platforms.
4. Panelists at various sessions noted issues with recruiting the next generation of providers. Such concerns permeated diverse specialties from orthopedics, ophthalmology, dermatology and oncology. In various conversations, panelists discussed the utilization of significant signing bonuses, long guarantees and student loan repayments. Some platforms noted expansion of programs like clinical research to attract new providers. Others have allowed younger physicians to work part-time and spend the balance of their time with another group to show the value of their organization and culture. Finally, platforms continue to review ways to use non-physician providers in an optimal manner to ensure professionals are operating at the “top of their license.”
5. Conference attendees openly predicted a growth in platform exits over the next couple of years. Such exits make sense after the record run-up of private equity deals in the healthcare space over the last five years. Funds exiting their initial platform investments will likely accelerate. Panelists heard about recent successful exits, like Pouschine Cook Capital Management’s exit from Golden State Dermatology and Sheridan Capital’s partial exit and recapitalization of Smile Doctors, as examples to follow.
Thanks to everyone who attended the event — we look forward to continuing the dialogue.