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Baird Capital brings global approach to small healthcare market

A global fund with a sweet spot in the lower middle market is a unique model that should bode well for Baird Capital as it pursues platforms in healthcare verticals like behavioral health, an executive of the firm said.

Michael Bernstein, a partner of Robert W. Baird & Co’s private equity arm, said the firm typically competes with sponsors that don’t have a global team or angle. In other words, most existing global private equity funds are seeking midsize to large transactions.

Bernstein, who leads Baird’s healthcare efforts in the U.S., works with colleagues in Europe and Asia. Together the team governs each deal executed in the sector.

While Baird has historically sought assets generating EBITDA in the $5 million to $15 million range, today’s frothy market has inspired the firm to pursue even smaller deals in verticals like autism-treatment services, Bernstein said in an interview at Baird’s 2017 Global Healthcare Conference at the InterContinental New York Barclay Hotel.

That’s largely a factor of what’s available. With only a handful of scale businesses in a market that remains highly fragmented yet in huge demand, smaller autism-treatment services “have the bones to become a good platform,” Bernstein said.

More specifically, Bernstein said, there’s an opportunity to take advantage of the maturing commercial-insurance market.

“Some businesses were built upon commercial-insurance reimbursement, but the businesses that are most interesting to us grew up with the lower reimbursement typical of Medicaid and other government programs,” Bernstein said.

“Those businesses are very lean operations and will enjoy margin expansion as they begin to access commercial insurance.”

While sub-$5 million-EBITDA autism businesses are trading at multiples of revenue, valuation multiples pan out to about 10x to 12x based on implied EBITDA, Bernstein said.

Notable autism-treatment providers of scale include Autism Learning Partners, which Great Point Partners bought in 2010. There’s also Center for Autism & Related Disorders, which Buyouts in December reported scored an investment from Summit Partners in a $300 million deal.

More recent investments include Petra Capital Partners’ and MMC Health Services’ acquisition of Alternative Behavior Strategies just this week; Shore Capital’s June recap of Behavioral Innovations; and Jordan Co.’s May investment in Invo Healthcare Associates.

Other behavioral-health verticals of interest at Baird are traumatic brain injury and substance-abuse treatment including opioid-treatment services, Bernstein said.

The firm also continues to seek opportunities in hospital outsourcing, and specifically in niche verticals like medical-device maintenance. The subsector, in which it already made a bet through its investment in Alpha Source, remains in vogue as hospitals continue to face immense cost pressures, opting to use equipment for longer periods, Bernstein said.

Baird invests out of Baird Capital Global Fund I, which closed in June at $310 million, exceeding its original target of $300 million.

Three investments have been made out of the fund thus far, and the firm expects to make another couple by year’s end or early 2018, Bernstein said. The firm is also inclined to make fewer but bigger bets — that is, inject more than its historical $20 million to $30 million of equity per investment, he added.

Action Item: Baird Capital’s portfolio:

Michael Bernstein, partner at Robert W. Baird & Co. Photo courtesy of the firm.