Dissecting the CARES Act on the frontlines

How the CARES Act may affect PE-backed healthcare companies and New Mountain Capital's sale of Equian wins Deal of the Year.

It’s “Thursday”, everybody.

There’s no differentiating between the days and hours of each day when every aspect of your life takes place in the same space. Time feels increasingly blurry. Although I am very serious about staying indoors on a 24/7 basis, I’m doing what I can to support small businesses in the neighborhood in small doses.

In Brooklyn, for instance, the private chefs that live below me are delivering delicious Lebanese food locally. Meanwhile, neighborhood bars are selling containers of old fashions and margaritas “to-go” out their windows (with masks and gloves on, among other precautions). There’s a first for everything.

Speaking of small business, all eyes are on the CARES Act this week as sponsors and businesses across industries try to grasp how they may or may not be in a position to benefit from new funding streams or other measures of financial relief.

Much of the immediate conversation has been around SBA paycheck protection loans for businesses impacted by covid-19. Potential problem for PE? The bill states that an applicant and its affiliates have to meet the 500 employee size limit.

Based on the language in the CARES Act, the prevailing view at the moment is that portfolio companies where the PE firm has a controlling interest may be considered an affiliate – and thus many would be precluded.

Still, there may be some PE-backed healthcare companies with existing structures in place that put them in a position to apply for the SBA loans, Rick Zall, chair of the healthcare group at Proskauer Group, told me. For example, if a firm is invested in a physician practice group through an MSO [management service organization] agreement, it could qualify, he said.

“We’re looking at potentially where some of those practices could apply and [where their PE partner] may not be considered an affiliate,” Zall said. “Those practices have clinical control … And that’s a potential avenue for participation.”

Should these investments apply, Zall clarified that the loans would cover the payroll costs of the doctors and other clinical workforce, and not the non-clinical MSO staff in which the PE firm invests.
For most PE-backed healthcare providers, the Advanced/Accelerated Medicare Payment Program appears to be the most immediately available and directly impactful initiative, according to Farragut Square Group President and Political Strategist Brian Fortune. “Pretty much everyone with Medicare volume can access this.”

Simply put, the rule allows healthcare providers and suppliers to apply for accelerated or advanced Medicare payments through the covid-10 outbreak, with specific grace periods for repayment of funds. The program extends beyond an existing CMS program aimed exclusively at inpatient hospitals.

In healthcare, this may apply to many providers suffering from a near-term drop in patient cancellations. That leads to one longer-term question for any ASC [ambulatory surgery center] provider or PPM [physician practice management] business facing a delay in elective procedures, Fortune said: “What’s your surge capacity when the lights go back on?”

“There’s a functionable limit,” Fortune said, and thus the question becomes: what portion of revenue is delayed versus forgone?
There are various other potential avenues for financial or operational relief under the CARES Act, and talks of a fourth stimulus are underway. Stay tuned for my for my full story on potential implications for healthcare providers.

Top Scoops
Although many remain focused on liquidity, cash preservation and survival through the crisis, there is still lots of idea generation going around on how to put money to work. Big picture: unlike prior crises, the economy was strong going into this, which generally seems to be lending to a more positive tone from an investment perspective.

Whether you plan to stick to your knitting, are thinking about investing in the debt of portfolio companies or PIPE deals, some PE firms are also prepping companies to hit the auction block in the aftermath of coronavirus.

One example is Ares Management, which hired bankers ahead of the market turmoil to advise Unified Women’s Healthcare on a future sale. Read more.

Deal Awards: It wasn’t long ago that everyone was talking about competitive auctions and record breaking deal multiples occurring across the healthcare industry. Buyouts’ list of 2019 deal awards is finally out, including one deal at the nexus of healthcare and payment services.

Our overall Deal of the Year winner (as well as large-cap deal winner) was New Mountain Capital’s sale of Equian, a healthcare payment integrity provider. New Mountain sold Equian last year to United Healthcare Group’s Optum for a total enterprise value of about $3.2 billion, or nearly 7x its value three-and-a-half years earlier. The sale generated a gross multiple of about 8.3x and a gross IRR of about 79 percent, a source familiar with matter told me. Check it out here.

That’s it for today’s rundown. As always, reach me at springle@buyoutsinsider.com with your comments, tips or just to say hello.