Taking Control in a Deal as a Private Equity Investor
Private Equity Investors pushing through a healthcare transaction may be eager to see their vision for the acquired business come to fruition. Although it is the responsibility of both the buyer and the seller to move the transaction along, The Ambulatory M&A Advisor has some advice for private equity investors that can help them feel more in control when hashing out the terms of a deal.
Joshua Kaye, partner with the law firm DLA Piper says that first off when a physician entrepreneur or other healthcare company is considering whether to partner with a private equity investor, they should consider what the benefits are of that partnership. Kaye says that while purchase price proceeds are an obvious, important component to it, it should not be the sole driver of who they decide to partner with.
“In my view of private equity partners, industry experience and their portfolio of other healthcare companies that are symbiotic to the physician entrepreneur that is looking for a partner, will add tremendous value to the long term success of that company. In that regard, industry experience is absolutely critical to the success of that partnership with a private equity sponsor,” Kaye says, explaining one way that investors can show their value right out of the gate.
“By way of example, a private equity fund that has investments in physician services will have a unique understanding and experience in investing in other types of physician specialties. Similarly, a private equity fund that has industry experience or portfolio companies in technology, may be a great option for a physician entrepreneur or other healthcare company that is developing a healthcare technology.”
Pedro Moore, Executive Director of Delaware Innovation Fund explains that regardless of how successful a private equity investor is, industry experience is always key when working with the healthcare field.
“That experience can impact a transaction greatly because the investor value-added is their expertise in a particular field. If an investor has deeper experience then the entrepreneur – he/she would have the upper hand in strategizing the path of the company or at least help guide it,” Moore says.
Kay concurs that industry relationships are extremely valuable when considering the success of a transaction.
“Again, this is not just about how big of a check the private equity sponsor can write. In my view the successful transactions are those where the existing entrepreneur/seller and the private equity sponsor have similar expectations about the direction and growth of the target company,” Kaye says.
Utilizing the private equity funds industry relationships to help realize that growth trajectory is, in his view, one of the often overlooked values that an entrepreneur should be considering when deciding with whom to partner.
James Hill, partner with the law firm Benesch explains that there are various types of control or influence that a private equity investor have in the deal.
“You need to justify the compliance regulations,” Hill says, following up with the example that not doing so can lead to not only financial difficulties but could also lead to the complete failure of the business if certain state and federal compliance regulations are not followed.
Hill says once the idea of understanding regulations is under control the seller needs to understand that these types of deals fall under a different geography and are situations where the investor wants to spread its wings and grow. Hill explains that healthcare regulatory expertise will help push the deal along at a proper speed and will prove beneficial after the deal because the incestor will be able to expand beyond their current reputation with the business’ current states and cities.
Moore explains that beside doing maybe a few small things, the investor has the power to help expedite the overall transaction process, but experience between both parties definitely helps to speed the process up in general.
“You’ve been down the road several times before so you know what to expect, you can identify red flags before they happen etc,” Moore says.
Kaye says that there are two things that a private equity investor can do to speed up the overall deal process. First, the delay in signing to closing is often caused by a prolonged due diligence process.
“A private equity investor that has the proper resources to expedite due diligence can clearly speed up the period of time between going from the execution of a LOI to the closing of a transaction. In some instances however, that delay is caused by the target if they fail to be prepared and organize its documents and address compliance issues on the front end,” Kaye says.
So, while a private equity investor can certainly speed up the overall process by having the resources available to expeditiously run through due diligence, it is also incumbent upon the seller to be in a position to be responsive in a meaningful and complete way.
“The other thing that I would say to this point is that while speed is an important aspect to the closing of a transaction; and I firmly believe that deals live and die by virtue of the momentum from signing to closing. Open communication about the deal process and delays in that process are also critical,” Kaye says.
“In many instances a private equity investor will suggest that it can meet unrealistic timing expectations only to blow through them for fear that they would not have otherwise gotten the deal had they been transparent with the seller on the front end. Sometimes that discussion of what the obstacles might be to close can help manage all party expectations in terms of the timing of closing.”
On the topic of speeding up the the transaction process, Hill says that private equity investors can shop around for businesses with a culture that fits with theirs so that their views can be aligned from the start. Hill says otherwise, the process could take longer because a private equity investor would slowly have to build a business culture in the deal and attempting to slam one together could lead to a sour taste in both party’s mouths, therefor leading to the potential death of the transaction itself.
If you have an interest in learning more about the subject matter covered in this article, the M&A process or desire to discuss your current situation, please contact Blayne Rush, Investment Banker at 469-385-7792 or Blayne@AmbulatoryAlliances.com.