Healthy Investments

Investors look to take advantage of the growing opportunities in health care

As health care continues to be on the forefront of everyone’s mind, M&A activity is picking up. Mergers & Acquisitions convened a special roundtable to discuss the role health care is playing in today’s economy and how investors are getting in on the action. Madison Capital Funding and Katten Muchin Rosenman LLP sponsored the event and the excerpted discussion that follows provides a range of perspectives on what middle market dealmakers can expect from these companies going forward. Participants included private equity investors, a lender and an investment banker.

Mary Kathleen Flynn, Mergers & Acquisitions (moderator): Where are the biggest opportunities in health care today?

Doug Schillinger, DW Healthcare: DW Healthcare is very opportunistic. We do not sit around the table on an annual or semi-annual basis and say: "These are the three or four sectors that we are going to focus all of our attention on." We will pursue companies that can excel in traditionally poor regulatory environments or unhealthy regulatory environments if we believe we found the best of breed in that particular sector. For example, we partnered with Madison Capital on a deal, which is an outsource rehab therapy company in skilled nursing facilities. The business is growing 30 percent year over year. We believe we found a team and a business that simply does it better and can operate in a very difficult regulatory environment, which actually becomes a bit of a competitive advantage because the other competitors can't navigate as fast as they can, allowing them to pick up market share.

Brian Miller, Linden Capital Partners: Linden's approach is very focused. We don't do it on a yearly basis-more like on a two- to four-year basis-but we will pick about four sectors where we go deep. We devote a team with the same partner, post-MBA and pre-MBA, and recruit an operating partner or two, which sometimes becomes the company's future CEO, to work together in that sector.

We currently have live teams in diagnostics and dental. The dental team has executed on three deals and many relationships. The sectors we like have a few things in common. Generally, they are a little less reimbursement heavy. You can't eliminate reimbursement risk from health care investing, but we have attempted to minimize it. With that said, one of our recent successes was in the behavioral space where a good chunk of the revenue came from Medicaid, which can be a very tough payer to have. So we take our shots and try to diversify across the portfolio.

Brian Morfitt, Frazier Healthcare: We're a little bit of a hybrid of what we just heard. We definitely have themes. They don't tend to be three- to four-year themes; maybe a little bit shorter themes. We pick spots where we think there is opportunity and we do so in concert with an operating partner, but we also are opportunistic in what we do. Just broadly, areas that we're looking at are cost-reducing businesses and higher quality-so better, faster and cheaper.

Somebody who's going to get a better outcome at a lower cost is going to win, or at least have a better chance to win.

M. Fazle Husain, Metalmark Capital: About once a year we pick a couple of sectors that we want to get deep into and we develop relationships. I'd say this year and perhaps next year, companies, whether they're diagnostic companies or service companies that are focused on taking some cost out of the system, will be the right place to invest. Outsourcing falls within that.

Flynn: DW invests in companies that are founder-owned. So what happens after you buy: Do you put in new management or an operating partner?