Bain Capital shares healthcare outlook; Golub reports on mid-market private company earnings in Q4

Mid-market private companies post an earnings surge, according to a new report.

Happy Fri-yay, Hubsters!

Aaron here on this freaky Friday the 13th.

We’re doubling down on healthcare today. We’ll kick things off with a sector outlook from a top 10 firm on the Buyouts 100 list.

Next up, a report on M&A activity in healthcare, and then moving beyond the sector, we’ll dig into some Q4 2022 numbers about the growth of middle-market private companies.

We’ve also got an exclusive piece on Alpine’s latest investment, and then we’ll close with the most recent podcast episode from PEI Group, all about inclusion and diversity in private equity.

Healthcare heartbeat. As you may know, we have been doing a series of outlook Q&A pieces from various PE experts and dealmaker extraordinaries. Focusing on the healthcare sector, I got thoughts from Chris Gordon, a partner and the global head of healthcare at Bain Capital.

Here’s an excerpt:

What was the biggest challenge to completing deals in 2022?
As in any period of value dislocation, it can be very challenging for buyers and sellers to find common ground. Sellers remember the still-recent past and buyers fear the future.
Completing investments in this type of environment requires a lot of conviction and creativity, the ability to invest across asset classes, and real, demonstrated value-creation capability. If you believe you can drive real operating value through valuation cycles, then the focus becomes long-term growth.

What will be the most important trends affecting your dealmaking in 2023?
We’re focused on a variety of interesting dynamics in the healthcare investment space, including:

1) Healthcare labor cost and availability. A lot of healthcare services businesses are facing real challenges between a scarce and expensive labor market, and payors that take a long time to adjust to that reality. These providers will need to analyze their business models and balance sheets (including potential technology investment) to figure out how to deliver strong patient care in the current cost environment. This type of dynamism will create challenges but also opportunities.

2) Depressed public market valuations. Many companies (particularly in the biotech space) fund their activities by accessing public markets. That funding source has always been somewhat volatile. The current downcycle creates a tremendous opportunity for more stable forms of private capital with the right clinical development expertise to support these companies. The active collaboration between our global private equity team and the team at Bain Capital Life Sciences differentially positions us to make these investments.

You can read the whole piece here.

Sub-sector success. Funds have been more selective, searching for pockets of activity in choice subsectors and even geographies, according to a report on healthcare investing from Bain and Company.

“Funds looked for businesses resilient to a potential inflation-driven downturn or ways to take advantage of falling public valuations,” said the report. “From a healthcare subsector perspective, life sciences continued to attract interest from buyout funds, and we have seen a shift in activity toward healthcare information technology (HCIT). Investors see long-term HCIT opportunity around redefining care delivery and accelerating clinical breakthroughs, and in 2022, there was particular interest in buyouts for businesses that will help optimize operations, especially given the possibility of a recession.”

Revenue rise. Some surprisingly good news: Mid-market private companies in the Golub Capital Altman Index experienced year-over-year earnings growth of 9 percent and revenue growth of 11 percent during October and November.

Of the four key sectors tracked, technology grew 12.8 percent; industrials climbed 10.7 percent; healthcare jumped 10.3 percent, and consumer rose 9.4 percent.

“This quarter’s results are a positive surprise. Revenue and profit growth each exceeded inflation by significant margins,” said Lawrence Golub, CEO of Golub Capital. “We believe these strong results reflect both stronger U.S. economic conditions than many analysts expect and Golub Capital’s focus on lending to recession-resilient companies backed by private equity owners who adapt nimbly to changing conditions.”

The data is based on real earnings and revenue of approximately 110-150 private US companies in Golub’s loan portfolio.

Inventory shrinkage. Retailers have been besieged by challenges over the last several years, as consumers shop increasingly online for several reasons, including fear of crime, wrote Obey Martin Manayiti.

Obey spoke with Alpine Investors’ co-founder partner Mark Strauch, who co-leads the software and tech-enabled services vertical at the San Francisco PE firm and serves as chairman of ASG, and Steve Reardon, the CEO of Alpine Software Group, about its recent milestone investment.

Obey wrote an exclusive story about how ASG has acquired ThinkLP, a Waterloo, Ontario-based provider of software designed to reduce inventory “shrinkage” ((an accounting term used to describe when a store has fewer items in stock than in its recorded book inventory due to theft and other factors).

The deal marks the 50th acquisition for ASG since 2016. Specializing in Software-as-a-Service, the Walnut Creek, California-based business has acquired companies across 10 verticals with 17 distinct companies, partnering with more than 70 founders.

“Shrinkage will always be an issue, but the customers that have implemented this product have seen a very real reduction in loss,” Strauch said.

In an industry in which margins are constrained because of the hyper-competitive environment they operate in, Reardon said retailers are looking at every part of the supply chain to minimize shrinkage and improve efficiency, and software has proven effective.“ThinkLP is deeply embedded in our customers’ workflow,” Reardon said. “It’s providing a solution to a growing and emergent problem that retailers are facing all over the world, and it’s a business that is not only potentially defensible in a downturn, but it often actually grows in a downturn.”

You can read the whole story here.

LGBTQ+ support. In the second episode of Private Equity International’s On the Minds of Millennials miniseries, Advent International’s Christina Drakos and KKR’s Brandon Donnenfeld share experiences about coming out in the PE industry.

The LGBTQ+ community is still very much under-represented within private equity, so much so that there is hardly any data to contend with compared to other diversity measures such as ethnicity and gender. As a result, LGBTQ+ professionals may struggle with their identity within a work setting. So it is essential that firms prioritize wellbeing and create an environment where employees feel comfortable to be themselves, said Mina Tumay and Evie Rusman, who hosted the episode.

You can listen to the podcast here.

That is going to do it for today. I wish everyone a wonderful wildcard and long weekend.
PEI Group in the US will be closed on Monday, in honor of Dr. Martin Luther King Jr.

I’ll be back on the Wire on Tuesday.