Health care providers still have catching up to do, technologically speaking. The technology businesses that provide health care services are increasingly attractive M&A targets, and they are expected to draw buyers for years to come, says Josh Earl, principal at Chicago private equity firm GTCR. GTCR recently acquired software developer Rx30, which makes pharmacy-management programs for hospitals, long-term care facilities and specialty pharmacies. After that deal, the firm sold for-profit hospital business Capella Healthcare to Medical Properties Trust (NYSE: MPW) for $900 million. 

In keeping with what the firm calls its “leader’s strategy,” where GTCR partners with management leaders to identify and acquire companies, the firm partnered with Rx30 CEO Steve Wubker for the deal. That strategy won GTCR Mergers & Acquisitions M&A Mid-Market Private Equity Firm of the Year Award for 2013.

Other buyers are also scooping up health care technology providers. In May, Fijifilm Medical Systems USA bought clinical archiving technology provider TeraMedica Inc., and IMS Health (NYSE: IMS) purchased Dataline Software. A variety of factors, including government regulations and innovation, are behind the deal frenzy in the space, which won’t slow down any time soon, Earl tells Mergers & Acquisitions. For more on haelth care technology, see 5 Technologies That Drove Health Care M&A in 2014. 

Why did GTCR invest in Rx30?

We like the health care information technology space in general, and many of the businesses we like tend to be niche businesses. We want to be a dominant market provider. You have a lot of providers of different services, software and technology, trading at very high valuations, and many of them have the opportunity to go public before even becoming profitable. Several of the companies going public are below our threshold, but this space is fairly fragmented and very stable. Revenue is growing, and Rx30 has a lot of market share they can go out and get. This company could be a public company over time, but our plan is to own it and grow it over a significant period of time.

What’s driving M&A activity in health care IT?

This space has a lot of growth in it. IT spending in health care is below what it is in every other industry. Health care, broadly, is behind in IT utilization. It is common knowledge that health care could be helped by using more technology at every point.

How long will the wave last?

Part of this was driven by the high tech spending, which is when the federal government funds were driving increased IT utilization at the hospital and physician level. That drove increased penetration of core systems. Those core systems generate data, but they didn’t know what to do with it. Then, after a big uptick in electronic health records, which is also driven by government spending, analytics popped up. I think you’ll continue to see that at least for the next five years, if not longer. At some point, the industry will mature and you’ll see large providers of analytics.

If companies are quickly going public, what happens to opportunities for private equity firms?

These companies don’t take that many dollars and they can skip this type of capital entirely. The good news is you can look up health care IT providers and there are thousands. It’s a very big universe and I do not think there is a dearth of opportunity, but I do think in this market environment you see many companies skipping a traditional private equity path and going from a venture stage to the public market. The reality is that the analytics space is much newer, so you are going to have much higher growth. In the pharmacy software space, there aren’t a lot of new units and it’s a much more stable market. So if you think of the industry in total, pharmacy is a much more niche market and analytics is a larger, more addressable market. There is movement in this space right now at every level. There is venture money, private equity money and public money as these companies go public. As the industry matures you will see consolidation. We are still in the growth stage, and that’s why you are seeing so much activity.

What’s ahead for GTCR in health care?

We like this niche space, and there are other niches we are looking into to find the dominant, tier-one provider to go after. I think you’ll see us do more of these deals in the next year.

Technology