Deerfield’s Jim Flynn on healthcare investing, ‘LPs are drinking from a firehose’ in PE fundraising

Morning Hubsters!

There’s an anecdote going around about private equity fundraising. Sources have told me somewhere in the range of 50 percent to 80 percent of existing GPs are back in the market fundraising. Despite everything going on in the world — inflation, supply chain disruptions, Russia’s invasion of Ukraine — LPs are beset with jammed fundraising pipelines.

“Every LP is drinking out of a firehose,” a placement agent told me recently. “They’re having to make decisions on the fly, who to re-up with and who not to re-up with. It’s not that they don’t want to re-up, but there’s a finite amount of capital.”

The jammed fundraising market is coming from established firms hitting the market quicker than expected, with larger funds and new products. It’s unusual, these days, for a successful firm to have just one flagship fund — so many GPs have expanded into ancillary lines of business like credit, or small-cap funds, or pools that target specific strategies.

Even with the frenetic pace of fundraising, LPs apparently can’t get enough private equity. A Preqin report this morning shows that 86 percent of the more than 350 LPs surveyed in November planned to invest the same or more in private equity. These findings are in line with other surveys in recent months that have shown no waning interest in the asset class.

It will be interesting to see how the dynamics this year impact emerging manager fundraising. This is an area I’m starting to explore for an upcoming article — with so many established firms back in market, where does that leave new shops, especially first-time funds? It doesn’t sound good, according to a few sources I’ve spoken with already.

The newer shops that will be able to attract capital are those run by well-known executives from larger shops, who already have relationships with LPs and proven track records, Hugh MacArthur, global head of private equity at Bain & Co, told me recently.

“There’s a flight to safety … and money will flow into those funds,” MacArthur said.

What do you think? Hit me up with your thoughts at cwitkowsky@buyoutsinsider.com.

Healthcare: PE Hub’s Aaron Weitzman interviewed Jim Flynn, managing partner at Deerfield Management Co, as part of its ongoing series on healthcare investing. Flynn outlined the firm’s approach to healthcare investing. Check it out here on the Hub.

Here’s a sample:

“Inflation in salaries for healthcare workers is doubling costs and is super high, due to supply/demand imbalance for workers,” said Flynn.

Recently trained nurses help only to an extent. “The issue is they haven’t been trained within a hospital system the same way they normally would be, so they are less efficient,” he said. “Even though there is new supply, it’s not relieving the problem.”

He also noted that input prices “are a mess right now,” and it’s unclear when or how they will recover.

“Inflation in other areas is challenging because the ability to pass on price is often regulated,” he said. “So, when input prices go up, companies don’t have the means to pass them forward and it all depends on the segment of the market they are in.”

More time: Banneker Partners, formed by an ex-Vista Equity executive, is eyeing a process for more time and capital with its pre-fund asset Linq, which provides software and services to school districts.

Banneker wants to move Linq into a continuation fund in a deal that could be valued up to $500 million. The deal would provide early pre-fund investors with liquidity, a source told Buyouts. Read here for more information.

That’s it for me! Hit me up with tips n’ gossip, feedback or book recommendations at cwitkowsky@buyoutsinsider.com or find me on LinkedIn.