Source: HCPD Conference

Top 7 Private Equity Firms Gobbling up Healthcare Sector in the Last Decade

Healthcare is poised to continue not only as a significant economic force, but one subject to ongoing disruption. If handled well, partnerships between PE investors and healthcare companies can produce highly successful outcomes.
By Sue Mai | 10 min read
on December 17, 2020
Source: HCPD Conference

Fifty-five percent of executives are on the hunt for acquisitions in the next year, according to Ernst & Young's 2020 Global Capital Confidence Barometer.

Private equity (PE) companies are increasingly a part of that deal-making. "The PE deal activity increase we saw in 2020 looks to be accelerating. Interestingly, while we can anticipate intense competition, we may also see more collaboration as PE investors club together with corporates to do deals," Steve Krouskos, EY's global vice chair of transaction advisory services, said.

Healthcare has not escaped this trend. PE investment in healthcare has been a driving force behind growth in the sector in recent years, and despite COVID-19, the capital available for investment is at record levels.

PE and Healthcare: Do They Really Match?

The wasteful, siloed and fragmented nature of health delivery are a natural match for the traditional PE skills of enhancing value by eliminating inefficiencies, improving operating models and consolidating markets. And future opportunity will likely be strong. Health care is poised to continue not only as a significant economic force, but one subject to ongoing disruption.

However, PE and health care can make for an uncomfortable pairing. Concerns have been expressed about possible implications of PE investments, including the potential for conflicts of interest. PE is often viewed as a force that will, at best, have limited impact on clinician behaviors, clinical outcomes and patient satisfaction.

To gauge the market’s perceptions, a survey was conducted with more than 80 health care company founders and executives with direct experience of PE investment in their physician practice management companies. The good news: 90% of them said PE involvement with their company has been positive overall.

A diagram of PE investment on healthcare business
Source: EY

Not only is PE perceived to have a beneficial overall impact on health care businesses, it is also considered to positively influence the focus on quality and clinical services. As well as providing greater access to capital, PE investors are credited with introducing leading practices from companies in their investment portfolios, especially with respect to improved management, clinical metrics and compliance systems.

a chart of PE investment in healthcare sector
Source: EY

In the past decade, the list of investors that have put their capital to work in the healthcare and life sciences industries has grown dramatically. Here are seven private equity firms that include healthcare in their portfolio and recently got their names in the list of Inc.’s Top 50 PE Firms 2020:

Top 7 PE Firms Investing in Healthcare Industry

1. Shore Capital Partners

Shore Capital Partners website homepage
Courtesy: Shore Capital Partners

Founded in 2009, Shore is a private equity firm focused exclusively on microcap healthcare investments. Based in Chicago, the firm specializes in making control equity investments in healthcare companies that have $5 million to $50 million of revenue. Shore supports management partners with capital, business development expertise, and industry knowledge to accelerate growth, fund acquisitions, and generate value to shareholders.

Companies in its current portfolio include Pediatric Therapy Services, a provider of therapy services to a variety of public school districts and private learning centers; Southern Veterinary Partners, a support organization for general veterinary practices in the Southeast; Chicagoland Smile Group, a dental support organization in Chicago; Florida Autism Centers, a provider of center-based applied behavior analysis treatment to children diagnosed with Autism Spectrum Disorder; and IZI Medical Products, a developer, manufacturer and provider of medical consumable accessories used in radiology, radiation therapy and image-guided surgery procedures; etc.

Chrystin Bullock, founder of Florida Autism Center, commented, “In seeking a partner for growth, it was important to select an organization that shared my commitment to clinical excellence. In Shore Capital we’ve found a partner with a track record of success and a deep understanding of the challenges in the autism therapy market.”

2. The Riverside Company

The Riverside Company website homepage
Courtesy: The Riverside Company

Founded in 1988 and based out of New York, Riverside considers a wide range of investments in many industries, including healthcare. The firm seeks control equity, minority equity, junior capital and other investments. Within healthcare, Riverside pursues investments in provider services and non-reimbursement healthcare industries, specifically within companies providing dermatology, dental and behavioral services, as well as providers of life sciences/pharmaceutical services.

U.S. companies in its health portfolio include American Hospice, a hospices manager; BeneSys, a provider of employee healthcare and pension benefit programs; Greenphire, a provider of payment processing, management and analytics software; The Dermatology Group, a provider of dermatological services; and Censis, a provider of surgical instrument tracking and workflow solutions; etc.

Healthcare companies choose Riverside because of its global team and reputation. Riverside provides: Exceptional Value Creation – Riverside understands how to support management teams in creating substantial value operating in the healthcare industry. Dedicated Healthcare Professionals – Riverside’s experts create opportunities by leveraging industry knowledge, longstanding relationships and established networks within healthcare to accelerate growth. Sector Expertise – Riverside is an active healthcare investor, with over 160 platform and add-on healthcare investments.

3. LLR Partners

LLR Partners website homepage
Courtesy: LLR Partners

Founded in 1999, LLR invests in a targeted set of industries, with a focus on middle market technology and services businesses. Within healthcare, the Philadelphia-based firm pursues investments in healthcare IT, outsourced healthcare services, managed care and provider-based organizations.

Companies in its healthcare portfolio include CareATC, a technology-driven employee population health management company; Numotion, a provider of complex rehabilitation products; Phreesia, a patient intake management platform for physicians’ offices; Schweiger Dermatology Group, the largest dermatology group practice in the Northeast; Eye Health America, an eye care practice management company in the Southeastern United States; and recently TrueLearn, a provider of online test preparation and data analytics to healthcare education and training institutions; etc.

“Empowering our doctors and healthcare providers is more important now than ever. LLR’s experience growing healthcare-focused training and education businesses and its network in our sector are exciting as we plan for the future,” said Dr. Joshua Courtney, CEO of TrueLearn. “The resources they bring to the table, including access to highly-relevant independent board members as well as dynamic growth and value creation strategies, will help TrueLearn elevate our mission to new heights, supporting more healthcare professionals as they launch their careers.”

4. NewSpring Capital

NewSpring website homepage
Courtesy: NewSpring

Founded in 1999, NewSpring seeks investments in growth companies with large market opportunities. Based in Radnor, Pa., the firm invests in several industries, including healthcare. One of its investment funds — NewSpring Healthcare — specifically targets healthcare companies across the healthcare services, specialty pharmaceutical and medical technology sectors.

Active healthcare companies in its portfolio include ContinuumRx, a provider of home infusion services; Sun Behavioral, which operates freestanding inpatient psychiatric hospital facilities; Verisma, an information technology provider focused on delivering release of information solutions to health systems and hospitals; Seniorlink, a provider of home and community-based services to seniors and people with disabilities; and recently Spiro Health, a post-acute and home medical equipment provider; etc.

“We see a massive opportunity to leverage the combined operations and expertise of our three member companies to capture a larger portion of this fast-growing home medical equipment market. NewSpring’s experience growing middle-market companies makes them the perfect partner to help us unify our member companies’ operations, expand into new geographies, and improve patient experiences.” — Gary Sheehan, CEO of Spiro Health.

5. Ridgemont Equity Partners

Ridgemont Equity Partners website homepage
Courtesy: Ridgemont Equity Partners

Founded in 1993, Ridgemont is focused on investing in middle market companies to secure majority ownership or be the lead minority investor. Based in Charlotte, N.C., the firm prefers to make more substantial investments from a dollars perspective in several sectors, including healthcare.

Companies in its healthcare portfolio include AccentHealth, a health education television network that delivers healthy programming to physicians’ offices; Allied 100, a provider of products and services to the automated external defibrillator marketplace; AMN Healthcare Services, a provider of healthcare staffing and management services; HealthMark Group, a technology-enabled provider of release of information and other health information management services; and OTech Group, a provider of patient intake management software and systems; etc.

“We strongly believe that we found the right cultural match in HealthMark and Ridgemont, who share our firm’s core principles of investing in innovative healthcare technology solutions, exceptional service, and long-term relationships,” said Bruce Steinhardt, CEO of OTech. “Additionally, we see an extraordinary opportunity to utilize the resources of the new platform to accelerate our momentum, enhance our offering, and deliver even more value to our clients.”

6. Fulcrum Equity Partners

Fulcrum Equity Partners website homepage
Courtesy: Fulcrum Equity Partners

Founded in 2005, Fulcrum focuses on making control and minority equity investments within healthcare and other industries. The firm has flexibility on investment size, including interest in pre-EBITDA businesses, and targets companies with up to $50 million in revenue. Within healthcare, the firm targets companies in the provider services, hospital/major facilities and non-reimbursement industries.

Companies in its healthcare portfolio include Summit Spine and Joint Centers, a management services organization that provides administrative and support services to interventional pain management clinics and ambulatory surgery centers in Atlanta; Stratasan, a provider of market intelligence to hospitals; Five Points Healthcare, an owner and operator of home health and hospice locations in several states; and CarePlus Management, a provider of anesthesia management and recruitment to ambulatory surgery centers; etc.

“The support of a highly successful firm like Fulcrum validates our market position and approach,” said Venkat Sharma, Chief Executive Officer of iHealth. “These funds will allow us to expand our customer base, provide a richer suite of products and services, and ensure that we have the expert resources in place to help providers thrive in the value-based payment models that will define the future of revenue cycle performance.”

7. Clearview Capital

Clearview Capital website
Courtesy: Clearview Capital

Founded in 1999, Clearview pursues majority ownership in lower middle market companies in healthcare and other industries. Within healthcare, the firm targets the provider services and non-reimbursement healthcare industries and pursues companies with revenues of at least $10 million. Clearview prefers to make more substantial investments from a dollars perspective.

Companies in its healthcare portfolio include Apothecare, an institutional pharmacy targeting the behavioral health sector in group homes and community-based settings in Massachusetts; Community Medical Services, a provider of medication-assisted treatment programs for patients suffering from opioid use disorder; Pediatric Health Choice, a provider of alternative-site healthcare services for mentally complex, technology-dependent and behaviorally challenged children; and Pyramid Healthcare, a provider of behavioral health services, including substance use disorder and mental health treatment; etc.

A Deeper Look for a Better Relationship

What may not be clear at the beginning of a PE deal is that a prime concern should be to figure out how to make the relationship work, by confronting and resolving any potential conflicts between investors and business owners on expectations. If handled well, it seems clear that partnerships between PE and health care companies can produce highly successful outcomes.

Executives and business owners and PE investors contemplating entering into a PE transaction will need not only to weigh the need for a ready source of capital, but also to consider the following:

What Will Unlock Value for Both Parties?

Value creation brings the promise of transforming the company and creating long-term viability by making the business better. Pathways to value differ — through digital transformation, reconfiguration of assets or repositioning to enter new markets.

The litmus test is whether a potential investor partner will bring the right entrepreneurial and management talent to complement the owners’ domain expertise to reinvigorate the company to achieve its full potential. Alignment includes:

  • Agreeing on validated business fundamentals that will release value
  • Sustaining relationships and governance including an openness to collaborate on a journey of constant reinvention to remain relevant to the future
  • Understanding that in health care, value creation will likely have a long-term investment horizon. Market segments and new technologies will grow at differing rates, so where should bets be placed that capture optimal alignment among market, product and timing?

Is Risk a Two-Way Street?

Both sides need to do due diligence, in commercial, operational, IT, human capital and cyber areas. In addition to the traditional financial, operational and tax diligence, environmental, social and governance diligence should be covered. Bringing partners along is vital, including:

  • Aligning expectations and requirements for risk and reward
  • Paying attention to the often-invisible cultural factors and organizational alignment that are vital for establishing a firm foundation for any business relationship
  • Managing business continuity and risk and accurately assessing the complexity of scaling a business across multiple geographic areas or market segments

Does Familiarity Matter?

The complexity of investing in health care (e.g., the science, the regulatory factors or the intricacy of payment mechanisms) gives an edge to PE firms that specialize in the sector. Evidence from our research suggests that people who know the health industry best appear to navigate it more successfully. Mastering the health industry includes:

  • Acquiring deep industry knowledge and a high degree of comfort operating in a highly regulated environment
  • Understanding that health is a people business and, as achieving outcomes for the patient motivates practitioners within the industry, this should also be a key concern for investors
  • Challenging and validating working assumptions about market trends, target company performance and new and expanded opportunities for both the company and its owners

Managing clinical processes can be complex, and health institutions can move slowly. Appreciating the constraints of the sector and a willingness to understand the complexities of each other’s businesses can lead to an enduring relationship with PE that positively affects the health of health care companies.

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