Private Equity and Urgent Care
The term Private Equity (PE) is typically used to refer to a PE firm, an investment firm that raises capital from a group of investors to acquire private companies. The investing done by PE is done on behalf of institutions.
Here, we have laid out all you need to know about PE and why firms are interested in the outpatient surgery center sector.
The Life Cycle of Private Equity
“PE firms typically raise capital from high net worth individuals and institutional investors with long term investment horizons, such as pensions,” he said.
These can be in the form of traditional institutions, family offices, and the like.
Blair says the life cycle of a PE fund can spend from 7 to 10 years looking for, acquiring and then exiting companies. Typical investments can be from 6 to 4 years.
“That period of time is adequate for our capital to be put to work and hopefully for us to see growth in the underlying business,” said Davis Griffin, Director at River Cities Capital Fund in the Cincinnati area.
Nathan Dapeer of Blue Sea Capital, LLC, says the investments made in this time period are “platform acquisitions,” or stand-alone meaningful investments.
A PE firm will hold investments for an average of 5 years and no longer than 7 years total.
In terms of the types of companies that PE firms look to invest in, much of the criteria is based on specific market needs or conditions as well as on the type of group doing the investing.
“One of the ways investment groups segment themselves is by size,” said Aaron Handler, Principal at Elm Creek Partners. “For instance, we tend to focus on companies in the $10-50 million revenue range that have less than $% million in EBITA, whereas many of our competitors will focus on companies in the $50-$500 million revenue range. There are participants at every size level.”
The profit margin of a company is also something that investors look at, although it is another factor that varies depending on the type of PE firm doing the investing.
“Growth or buyout firms will seek to acquire companies with high EBITDA margins, as this allows them to lever the companies to a higher degree,” Blair said. “Distressed/turnaround or venture capital firms will generally be less concerned with profitability.”
Handle notes that while profit margin impacts the valuation of a company, it won’t necessarily affect the opportunity.
Other factors that go into the search for a good investment on the part of a PE firm include unit economics.
“What we want to see in an ASC, or in a broader context a multi unit consumer facing healthcare services model, some of the key criteria looked for are leading unit economics,” Dapeer said. “That’s measured by patient volume, revenue, and profitability among other KPIs. We’d want to see really top notch unit economics, compelling provider relationships in the local markets, an industry leading compliance and regulatory program, and a good billing and collections department. As in any investment we’d want to see a strong management team.”
While a good management team is a plus, a company doesn’t necessarily need to have a management company in place to be a good investment, according to Handler.
The main characteristic of a company that would make a good investment involves growth potential.
“For River Cities, we are really focused on a segment of PE called growth equity, so we are looking for situations where our capital is going to be used to grow and expand the business,” Griffin said. “It’d be a combination of increased sales spending and marketing to sell more of a product or service. It may be for de novo expansion or tuck in acquisitions.”
Terms to Know
There are a few terms that are commonplace in the world of PE that might be unfamiliar to the owner operator of an urgent care center or other outpatient surgery center. The first of these would be “dry powder.”
“The term “dry powder” refers to uninvested cash,” Blair said. “It is important as it speaks to how much capacity a private equity firm has to make acquisitions. The current environment sees private equity sitting on unprecedented levels of dry powder; this cash needs to be deployed or investors will take it back.”
According to Griffin, dry powder in how it relates to an operating company would be capital on the company’s balance sheet that could be deployed to fund growth.
Another term worth understanding is “use it or lose it money.” This refers to the capital that might not be invested over the life cycle of the fund.
“Investors seek to provide capital to PE funds in order to generate returns that will help them in meeting their obligations,” Blair said. “The higher the returns and the faster they’re generated, the better. As such, investors will set timelines for private equity managers to invest their funds—if they haven’t been invested by a certain date, the investors will take the money back and invest it elsewhere.”
According to Blair, when this happens it can result in harm to the reputation of the PE managers. It can also affect their compensation.
The likelihood of this happening when dealing with a respected firm is slim, however. Griffin notes that in the whole history of River Cities, this has not once occurred.
For an owner operator to best understand PE, it is further important to note the distinction between a “financial sponsor buyer” and a “strategic buyer.”
“A financial sponsor would be a professional investor who invests customers’ capital into the asset class that they have versus a company who is operating in that particular segment of the market,” Handler explains.
It is the strategic buyer who operates in similar industries to the target company.
“Strategic buyers acquire companies for a variety of ‘strategic’ reasons: to eliminate competitors, to acquire new capabilities, to achieve greater power with suppliers or customers, etc.,” Blair said. “Cost and revenue synergies are important to strategic buyers.”
Basically, “financial buyer” is just another term for a PE fund, according to Griffin, who would look to continue to operate the business on a stand-alone basis.
Financial sponsor also look to exit through a divestiture to a strategic buyer or another financial sponsor or through an initial public offering.
PE and UCCs
There are a variety of reasons for PE to invest in urgent care centers, freestanding ERs, and the like. These involve the current level of use by the public of such centers as well as the lucrative nature of the outpatient surgery center.
“The services provided by urgent care centers will always be in relatively high demand, resulting in stable, predictable cash flow,” Blair said. “Investing in health services businesses allows private equity firms to achieve diversification in their portfolios, given that health services are only loosely tied to the economy. Lastly, there may be significant value that urgent care centers could provide in regions that are underserved by healthcare providers, or regions where emergency rooms are overburdened.”
The fact that these centers allow patients, payors and providers to escape the hospital setting also makes urgent care appealing to PE firms.
“This sector is a very attractive way to play the growth trends in healthcare and also simultaneously provide a better value proposition to all constituents in the system,” Dapeer said. “A higher quality of care, a more convenient offering at a lower cost outside the hospital setting.”
There’s no doubt that urgent care fits into the typical lifestyle of those seeking medical care, either on an urgent level or primary care basis.
“We think that urgent care fits a megatrend in healthcare, which is providing access to care in a way that is very consumer friendly,” Handler said. “Urgent care offers extended hours, the ability to be seen without an appointment. IN our markets which tend to be ex-urban markets, there is a real need for this service. In one way we are caring for patients that would otherwise travel to a hospital ER at a much higher cost, and we are also providing primary care to a population that is essentially underserved. We think urgent care is a ways to provide better outcomes at a lower cost to the overall healthcare system.”
Handler notes that all things considered, investing in urgent care centers and similar facilities can be a win-win for all those involved in the investment.
“One of the things we’ve learned is that you can throw money into the system, but that in and of itself does not create more access,” he said. “Urgent care is a good way to increase access points in a cost effective way. Between the need for more access points due to a lack of primary care physicians, more dollars being in the space and the desire to match people’s lifestyles, urgent care is a good concept today for delivering cost effect healthcare. Because of that it’s growing, and PE is interested in that.”
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