Court Square puts 40-year history of healthcare investing to work

'We look for growth-minded entrepreneurial management teams, market leaders in their niches, and companies that lower the cost of healthcare and/or improve patient experience,' said Court Square’s David Nguyen.

There are many private equity firms investing in healthcare these days, as PE Hub readers know well. That’s one of the reasons we launched this series profiling healthcare investors earlier this year. What makes Court Square Capital Partners stand out is sector expertise developed over 40 years, said managing partner David Nguyen.

“Healthcare has gotten very crowded, but we do feel like we’ve differentiated ourselves really nicely to management teams and founders we seek out as strong potential partners,” he said. With eight investment professionals working full-time on healthcare deals, Court Square goes head to head with healthcare-specific firms, according to Nguyen.

The firm focuses on investments in pharma value chain, durable medical equipment (DME) and distribution.

The firm’s focus on the mid-market is also a differentiator. “If you look at a lot of the other private equity firms out there, they have growth strategies, large cap, small cap, credit, etc., but all we work on at Court Square are middle market transactions,” he said.

Pull, not push

Court Square prides itself on its collaborative approach. “What we are trying to do when we look at investing with founders is turning a sale process about price into an interview about partnership,” Nguyen explained. The firm also embraces a “pull-not-push philosophy.”

“We’re not going to come in and tell the founders and the management teams what to do,” Nguyen said. “We’re going to respectfully talk about what the right growth strategy is, and how to execute upon it. We make decisions as a group, we are in it together, and we do not point fingers if things do not go as planned.”

The firm is often the first institutional capital invested in a company,  “which is rare for a fund of our size,” according to Nguyen.

“In healthcare, four of our most recent investments were founder-owned businesses where we’re the first outside capital,” he said. “Our focus on founder-owned companies boils down to two interrelated reasons. One is there’s outsized growth potential because they are earlier on in their lifecycle and oftentimes less than 10 years old. Additionally, these businesses typically could use help and building out processes, technology and infrastructure to allow them to scale.”

Common threads

David Nguyen, Court Square

“Typical investments of ours have EBITDA between $15 million to $75 million,” said Nguyen. “The common threads, other than size, are that we look for growth-minded entrepreneurial management teams, market leaders in their niches, and companies that lower the cost of healthcare and/or improve patient experience. These market leaders and these growth-oriented management teams, they have to be in sectors that we think long-term, over 10 plus years, have real wind behind their backs and will be significantly larger in the future than they are today.”

All about the tech

“As much as technology adoption has increased, and the focus on the consumer rightfully has increased, there is still a long way to go,” he said.

To that end, Court Square invested in a company called Advanced Diabetes Supply in 2020, which provides continuous glucose monitoring (CGM) for diabetic patients.

“The old technology used to be finger pricking and blood glucose monitoring,” he said. “CGM, which is an improved technology, helps lower the overall cost of the healthcare system and improves patient outcomes and experience. There is more real-time data for the patient, less hospitalizations, fewer comorbidities.”

Another tech-focused example is the firm’s investment in Health Union. The company owns and operates 40-plus condition-specific social communities.

“If you think of, or multiple, these are domains that Health Union manages, where there are daily, highly curated content updates, and comprise of communities where over 85 percent of visitors actually have the condition,” he said. “It is very different from a WebMD, where people are going to try to figure out what they have, with billions of views each year.”

Health Union’s domains feature more focused communities that help people navigate a disease or a condition. The company is “technologically driven, because it is online, it’s digital, and it’s mobile – not to mention about exciting growth initiatives like a privacy-compliant data strategy.”

“The great news about healthcare is that, as you look down the road, given the aging population, the increase in comorbidities and polychronic diseases, and the lack of infrastructure and technology, the future looks very bright for PE investing,” said Nguyen. “In addition to growing healthcare expenditures, the continued focus on the consumer and the innovation that’s disrupting traditional models also bodes well and signals healthy growth for a lot of different sectors in healthcare.”

Exit strategy

“On exits, we don’t have any prescribed timeframe, nor strategy around exit, whether to a sponsor, or to a strategic, or to the public market,” he said. “This goes back to our DNA, our partnership approach with our management teams. It really starts with what we and the management team want to do together to create value. If a management team never wants to become a public company, we are not going to force them to become a public company.”

He noted that the average hold time is four to five years.

“There’s really no rule as to whether it’s three years, or five years, other than sometimes the management team and we feel like if we are in a good market, and there is still a lot of upside left for the next buyer, whether they’re a sponsor or a strategic buyer, we may agree that it’s time to test the market.”

One example of a quicker exit was with a business called Medical Knowledge Group, which the firm backed initially in 2019 and sold to Novo Holding earlier this year.

“It was a very well-run company, and it had been private equity owned before, yet it was still run by the founder who started the company 20 years prior,” he said. “We helped the management team double the business in two years. We drove more investments in analytics/technology. We augmented the BD function. And we helped develop and execute on a comprehensive M&A strategy. As the business had more than doubled in two years, there was a lot of inbound interest, so we decided to test the market and we ended up finding a really good partner for the management team. Although it was an investment for just over two years, we made a return for our investors of 3.4x MOCI and over 75 percent IRR.”

Firm facts

Founded in 1979 and based in New York City, Court Square Capital Partners is a private equity firm focused on leveraged buyout transactions in the US mid-market. Court Square was originally a captive merchant banking firm within Citigroup known as Citigroup Venture Capital. The firm invested off of Citi’s balance sheet for the first 20 years of its existence, then raised its first fund with outside capital in 2000. Court Square is currently investing Fund IV, which closed in January 2020.

Recent investments

As noted above, Court Square invested in Health Union and Advanced Diabetes Supply in 2020.

Recent exits

As mentioned above, Court Square exited Medical Knowledge Group in 2022 after an initial investment in 2019, as it was sold to sponsor Novo Holding.

Court Square exited NDC in 2021 after an initial investment in 2016, as it was sold to sponsor Platinum Equity.

Court Square exited NSM in 2019 after an initial investment in 2016, as it was sold to sponsor Cinven.

Court Square’s healthcare portfolio highlights

(Dates refer to initial investments)

Advanced Diabetes Supply: A national distributor of durable medical equipment, specializing in the home delivery of diabetes products including continuous glucose monitoring and other testing supplies. ADS provides diabetic products directly to patients and assists with payor authorization and approval. (December 2020)

Celerion: A global provider of outsourced pharmaceutical clinical research services focused on early-stage trials. (November 2017)

Golden State Medical Supply: A provider of generic pharmaceuticals to the US Department of Veterans Affairs and US Department of Defense. GSMS sources products directly from manufacturers in bulk, packages them per government requirements, and ships the products to the government’s prime vendors. (June 2019)

Health Union: A developer and operator of digital patient communities focused on specific conditions that are monetized primarily through pharmaceutical digital advertising. (December 2020)

Integrated Prescription Management: A pharmacy benefit manager serving self-funded employers and third-party administrators. The company manages the pharmacy benefit for self-insured clients, which consists of managing and adjudicating prescription claims as well as negotiating with pharmacies. (August 2018)

Knipper Health: A provider of pharmaceutical sample and marketing solutions to drug manufacturers in the US. (October 2019)