The Healthcare Download: Summing Up Growth Equity Investments in Healthcare Services and IT

Family offices and ultra high net worth investors seeking direct investment in emerging growth healthcare companies can look to healthcare IT and healthcare services firms for outsized returns. These two segments are ripe with high return opportunities as evidenced by the rising volume of growth equity investment from corporates, private equity, and venture capital firms. Healthcare IT in 2013 saw the highest volume of capital raising transactions since 2005 with $2.7 billion invested. The subsector has been aided by government initiatives dating back several years through reforms such as the HITECH Act (Health Information Technology for Clinical Health Act), which preceded the Affordable Care Act. Under the HITECH Act, the Department of Health and Human Services spent up to $30 billion to promote and expand the adoption of health information technology.

Meanwhile, healthcare services companies continue to create new efficiencies in the delivery of care while improving patient outcomes, thus yielding benefits to the healthcare system as a whole.

Healthcare IT investment can be exemplified by companies such as Lumeris, which received $71 million from Kleiner Perkins, Camden Partners, Sandbox Industries and others earlier this year. The Company develops cloud-based technologies that provide operational support, technology, and consulting services to health systems, payers, and providers. In 2012, Lumeris reportedly employed 550 people in St. Louis, Boston, and Hyderbad, India, and had annual revenues of $500 million. Another notable transaction was Draper Fisher’s recent investment in Doximity. The venture capital firm along with Emergence Capital Partners, Interwest Partners, Morgan Stanley, Morgenthaler, and T. Rowe Price invested $54 million in the Company, which is an online social networking service for U.S. physicians. Launched in 2011, Doximity has grown to over 295,000 verified physician members as of January 2014.

Not surprisingly, corporates have also been active in the healthcare IT space. The Advisory Board Company (Nasdaq GS:ABCO) and others invested in Evolent Health; the most recent round totaled $100 million. The company integrates the technology, tools, and teams needed to advance value-based care delivery and innovative payment models. Meanwhile, Blue Cross and Blue Shield invested $15 million in Change Healthcare, a platform for healthcare cost transparency and engagement. Other corporates showing strong interest in healthcare IT include Merck Global Health Innovation, Kaiser Permanente, Novartis Venture Funds, Oracle, and WellPoint.

Investors of various types find the healthcare IT space attractive because it is large, dynamic, and growing quickly. Information technology will find its way into all aspects of care delivery, patient engagement, and health management because it is addressing a structural need. There is currently a lack of quality, pricing, cost, and medical record transparency – shortcomings felt by every stakeholder involved in the system. Healthcare IT is providing the solutions.

The healthcare services space has likewise found favor among investors, despite increased uncertainty surrounding the impact of recent regulatory reform. The services space includes hospitals, urgent care, behavioral health, laboratories/MRI/dialysis, managed care, rehabilitation, physician medical groups, and other services. More prominent participants in the space include traditional private equity firms such as Warburg Pincus, General Atlantic Partners, and Summit Partners. Healthcare services companies with strong recurring revenue and growing EBITDA are attractive growth investments given the strong historical performance and consistent demand for such services.

In the first half of 2014, Warburg Pincus invested in Complex Care Solutions and Specialists on Call, two specialty healthcare services companies. Complex Care provides face-to-face solutions for frail, special needs, and complex populations, offering short-term and long-term care management and assessment services to improve quality outcomes. Located in Rochester, NY, the Company recently received $40 million in funding. As its name suggests, Specialists On Call offers specialty physician services and provides on-call coverage to suburban and urban acute care hospitals via videoconferencing. Warburg invested $32 million in the Reston, VA Company.

Other niches within the healthcare services space also received attention from investors. PM Pediatrics, which provides after-hours pediatric care in New York and New Jersey, received a $14 million capital infusion from New York City-based hedge fund Scopia Capital Management. The Company’s services include general treatment of illnesses and injuries including asthma, fever, stomach distress, infections, fractures and stitches. Meanwhile, Pure Life Renal, an operator of kidney dialysis centers, pulled in $20 million from Hamilton Lane, Montreaux Equity Partners, and Noro-Moseley Partners. The Hollywood, FL Company provides business and operational management tools to enable partner physicians to concentrate on providing quality care.

Family offices seeking to invest in healthcare IT and healthcare services opportunities may be best served by establishing similar criteria employed by institutional investors. The criteria include i) a strong recurring revenue model, ii) a focus on companies that are beyond proof-of-concept, iii) a minimum EBITDA of $2 million or in exceptional high growth cases be within 12 to 18 months of achieving positive EBITDA, iv) revenue in excess of $10 million, and v) a large market opportunity well in excess of $100 million. Certain qualitative aspects of a desirable business will likely include a proven management team, a scalable business model with competitive differentiation, explicit rights to the use of data, and a broad potential acquirer universe.

In light of the changing healthcare landscape resulting from healthcare reform and payer policies, investors are paying close attention to those select firms creating efficiencies in the overall system while ensuring high quality care. Healthcare IT and select healthcare service firms, particularly in the lower middle market, have been innovative leaders in healthcare delivery. Growth equity investors have long been keen proponents of both subsectors and will continue to play an integral role in helping companies emerge into large-scale enterprises.

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