BA Venture Partners and Richland Ventures are selling their stakes in U.S. HealthWorks, an operator of outpatient occupational health and urgent care centers, to AIG Altaris Health Partners and Dynamic Healthcare Solutions. What makes the deal a bit unusual, however, is that fellow VC shareholders Three Arch Partners and Salix Ventures are sticking around. So let’s play 5 Questions with Mark Brooks, a managing director with BA Venture Partners and an outgoing board member of U.S. HealthWorks:
1. This is an interesting M&A deal, in that some of the VC backers are exiting and others are sticking around. Can you talk about how this came to be?
First, the sale price created a sizable gain for those of us who sold. But the overall issue was that the company plans to implement a whole set of steps to drive future value, and it would require investors to wait more than 12 months… and additional capital. The two firms that pulled out had been in it the longest, while those who stayed in and rolled over their equity hadn’t been there quite as long so felt comfortable sticking around more at least another year.
But, again, we made a nice gain. These are freestanding workers comp clinics, and at each one the cost of care is about half of what it is in a hospital. The company has a lot of interesting opportunities to further consolidate the market and create additional value, but it will take both time and capital.
2. Was the decision driven at all by the fact that Richland is raising a new fund and that BAVP is soliciting LP commitments to spin out of the parent bank?
I think I’m going to pass on that one…
3. This is just anecdotal, but it seems like there has been a recent surge in healthcare services investments, particularly of facility-based companies. Do you agree?
We haven’t done our 2006 count yet but, on a normalized basis, something like 60% of healthcare VC dollars do into biotech, 30% goes into med-tech and around 10% goes into healthcare services… But it wouldn’t surprise me if we’re seeing a slight shift right now. There is definite liquidity and multiples are extremely healthy. A decent healthcare services company can go out a 10-15 times EBITDA… Or maybe 10-12X is more reasonable, but it’s still a healthy rate. There also is still a relative dearth of available companies, so when you have one to sell there is a lot of appetite.
People sometimes ask how to make money on healthcare services companies, and if they are tech-based companies or just body shops. A lot of it is facilities and administration work, but the absolute dollars being spent is enormous, particularly when you consider how the population is aging. With a lot of bodies comes a lot of growth…
4. A number of private equity firms have formed acquisition platforms focused on the healthcare services space. Is that becoming a significant exit avenue, alongside IPOs and M&A with strategics?
Yes, it’s huge. There is a very strong M&A market that comps well to the IPO market for these companies, and a lot of it is fueled by private equity buyers that use leverage. At some point this will have to slow down because it just becomes trading from one firm to another – because the EBITDA keeps going up and returns go down – but we’re right now in a period where well-run companies can keep on growing.
5. Going back to our original topic, can true early-stage VCs really play in the healthcare services space, given the time and capital requirements?
We’re a multi-stage firm, so it’s not an issue for us. For example, we did a buyout last year. The issue for firms that want to invest in healthcare services is that you either need to get in a bit later on when the company is verging on profitability, or be willing to accept a much longer timeframe for a startup. In the first scenario, you’re in it for just about three years. In the latter one you need to plan on having a lot of capital pumped in later, and you probably can’t participate for less than an initial $5 million.