Behind the scenes of CVC’s investment in Carlyle-backed MedRisk

Increased infrastructure spending will only fuel demand for the workers comp services provided by MedRIsk, whose new backer CVC is fielding inbounds around its future M&A strategy.

A vastly untapped market opportunity, track record of growth, M&A possibilities and the future rebuilding of the nation’s infrastructure has more than one firm excited about the future of MedRisk, which manages the physical therapy claims process and coordinates care for injured workers. 

With this backdrop outweighing any covid impact to the business, CVC Capital Partners, given a second shot in recent years, ran hard at the opportunity to invest behind Carlyle Group-backed MedRisk. 

The exact structure of the recently announced deal is not clear, but the pair of firms will equally control MedRisk from a governance perspective, while CVC has a little more than 50 percent economic ownership, a source familiar with the deal said. 

CVC began tracking the workers compensation industry several years ago and when MedRisk went up for sale in 2017, the firm took a hard look, said CVC Partner Fazle Husain, who joined the firm that year from Metalmark Capital. “We were the runner-up in that process and loved the company, loved the management team.”

The growth story and cash flow dynamics under Carlyle only validated the firm’s excitement in the investment opportunity, as MedRisk had far exceeded CVC’s projections when it did diligence a few years back. 

“That gives us huge confidence, right?” Husain, who heads US Healthcare at CVC, told PE Hub. “It’s always great to track a company and see how they do relative to what they tell you. This company has always tracked better than they projected.” 

When MedRisk became available again, CVC – with a playbook centered around growth rates – wanted to ensure it prevailed. “This time around we were much more aggressive,” he said of the narrow, more defined process. CVC’s knowledge and longstanding relationships in the space were key: “We know every [workers comp] company that has more than $10 million of EBITDA.”

The structure was not what was originally contemplated, but CVC was ultimately more keen on a deal in which there was buy-in from Carlyle and management. “Carlyle was very happy staying in, we were happy coming in – and it was kind of the perfect structure that worked for all parties,” Husain said. 

About three years into its investment, Carlyle has produced a close to 3x MOIC, including the equity rolled over, the source familiar with the deal said. 

Financial terms of the transaction weren’t disclosed and the parties declined to comment, but sources previously told PE Hub MedRisk could trade hands at a high teens multiple of EBITDA. People familiar with the process cited $165 million in 2020 EBITDA and $180 million in projected 2021 EBITDA – suggesting MedRisk’s value has at least doubled its reported $1.28 billion value upon Carlyle’s initial investment.

More M&A, more market penetration, more infra spend

Despite a higher unemployment rate and physical therapy clinic closures in the height of the pandemic, Husain sees demand for MedRisk’s services coming back quickly as the country reopens. 

“We think the secular trends around more infrastructure spending are really going to be pretty incredible,” Husain said. “We don’t have to get into the ‘Roaring Twenties’ to make this very exciting, but there is a view that post-pandemic there could be as much as a decade of increased spending in some of those areas in the US, which would create some strong tailwinds for MedRisk.” 

On the heels of recent devastation in Texas fueled by the state’s power grid failure, President Joe Biden has pledged an ambitious infrastructure plan as his next policy priority – although the details are to-be-determined. 

CVC didn’t bake into its underwriting model the aforementioned Roaring Twenties scenario, but, Husain said, “there’s no question that infrastructure investments have to increase in the near term – and those are the types of projects that often result in increased workers compensation claims.”

Founded in 1994, MedRisk helps coordinate care and manage the claims process for injured workers receiving physical and occupational rehabilitation, chiropractic care and tele-rehabilitation. The company contracts with workers’ compensation insurance carriers, third-party administrators, self-insured employers, state funds and case management companies.

With or without additional infrastructure investment, a minority of the $60 billion workers’ comp industry is penetrated today, Husain said. About $35 billion of that stems from medical costs due to inefficiency, with the remainder lost wages. 

“Workers comp is still a relatively under-managed sector, relative to the regular healthcare services sector,” Husain said.  

As such, both organic and inorganic growth is in the cards for MedRisk.

“M&A will be part of our growth plan, there’s no question,” Husain said. At the same time, he added, “the company has done very well doing predominantly physical therapy only through its life-cycle, and frankly we don’t want to distract from that – we think there is still a lot of white space.” 

Sources previously told PE Hub that whoever ends up buying MedRisk could ultimately see a longer-term opportunity to combine the business with One Call, which is now owned by its lenders, KKR and Blackstone‘s GSO Capital Partners. Such a combination could lend to a lot of synergies, sources have suggested, with One Call’s workers’ comp services extending beyond the physical therapy arena, helping coordinate care in the dental, diagnostics, equipment and devices, home health and transport areas.

Husain declined to comment on One Call, but said that outside of physical therapy, there’s a number of companies that are smaller and could be consolidation opportunities. 

“We bring to the table a large balance sheet and a large capital source along with Carlyle,” he said. “Since the announcement of our investment we’ve already had a number of inbounds from companies that want to talk to us about M&A strategies.”

Carlyle declined to comment.