Since its founding in 2008, the Montréal-based private equity firm has focused exclusively on investing in established Canadian healthcare businesses. Five years on, as PCP markets its second fund, the strategy seems to be paying off.
In April, PCP announced the first close of Persistence Capital Partners II LP, raising over $90 million – more than the total amount raised by its debut partnership. PCP Fund II’s backers are primarily Canadian institutional investors, and include virtually all of the major LPs that committed to Fund I, says managing partner Stuart Elman in an interview with peHUB Canada. As it moves toward the partnership’s final closing, targeted for $225 million, the firm intends to cast an even wider net.
Aging populations, higher global living standards, and other converging macro-factors are driving greater demand for healthcare. Elman believes that institutional investors are consequently eager to gain exposure to mature businesses in the sector. This isn’t easy to accomplish in Canada, he observes, despite the fact that healthcare spending accounts for 12% of domestic GDP. One of the reasons is that most of the country’s healthcare companies are simply not visible in mainstream capital markets.
That’s where PCP can make a difference, says Elman. The firm invests in mid-market healthcare companies with revenues of between $5 million and $50 million, and EBITDA of between $1 million and $10 million. These are mostly private enterprises operating in sectors with little-or-no public payer risk, such as diagnostics, ancillary and uninsured medical services, and business-to-business services. Elman thinks that fragmentation in these sectors suggests multiple opportunities for consolidation and growth.
“We like to say that we invest in the best healthcare businesses you’ve never heard of,” he says.
PCP sources most deal flow through its own proprietary networks. This approach relies on the entrepreneurial and financial experience of the firm’s eight investment pros, who collectively account for over 55 healthcare M&A transactions, says Elman. PCP is led by four partners – co-founders Elman and his father Dr. Sheldon Elman, as well as managing partner Lloyd Segal and partner and CFO Éric Bergevin.
Since the first close of PCP Fund II, the firm has been adding to its bench strength. Among its most recent hires is John Trang, previously vice president at Canadian private equity firm TorQuest Partners, who has been named a principal. Deloitte’s Ryan Lambton was also brought on as the firm’s new director of financial reporting.
PCP has to date made seven platform investments. The first involved the acquisition of Montréal-based Medisys, a business focused on preventive, diagnostic and consultative healthcare services that was formed in 1987 by Sheldon Elman. Medisys, which went public in 2002, was returned to private ownership by PCP in 2008.
PCP divided the Medisys organization into four autonomous portfolio companies, each with its own management team. Medisys IMA, a provider of medical evaluations to insurers, proved to be an especially lucrative investment. With PCP’s support, the business was expanded nationwide and nearly tripled its EBITDA. In 2011, Medisys IMA was sold to TorQuest’s SCM Insurance Services, generating a multiple of 3.6x on invested capital and a gross IRR of 42 percent.
Other current portfolio companies include Medisys Corporate Health, a business health specialist; Lab BioMédic, a provider of clinical analyses; Manna Research, a local site investigator group; and Warnex, a life sciences research company. Through a partial exit from Warnex in 2012, PCP achieved a 57% IRR. PCP Fund I is now 90% invested, has had four full or partial liquidity events, and has distributed over 74% of paid-in capital to LPs, says Elman.
“PCP Fund II will follow in the path of its predecessor, because we believe there continues to be a significant opportunity for consolidating key vertical markets in Canadian healthcare,” Elman says. To this end, the new fund will emphasize control-stake acquisitions, growth equity deals, recapitalizations and consolidations. Investments will range in size from $10 million to $25 million.
PCP’s fund-raising occurs at an interesting time for the healthcare private equity industry. According to Bain & Co.’s Global Healthcare Private Equity Report 2013, deal-making has increasingly skewed to the mid-market. Bain also reports healthcare investments last year accounted for just over 10% of all deal values – well above the sub-10% levels seen for most of the past decade. Data provided by Thomson Reuters (publisher of peHUB Canada) indicate that Canadian activity in 2012 was considerably below the international average.
This perhaps explains why PCP doesn’t encounter much competition in its niche. Elman says many investors active in the space, such as OMERS Private Equity and Teachers’ Private Capital, prefer large-cap transactions, while others are generalists that show only occasional interest in healthcare. One exception, of course, is U.S.-based specialty firm DW Healthcare Partners, which earlier this year opened an office in Toronto.
Elman believes PCP’s market position also owes to the firm’s sector expertise and knowledge about the workings of Canada’s complex regulatory framework. In addition to their investor backgrounds, top execs are also former physicians and medical company owners and operators. This, he says, gives PCP a big advantage in a challenging deal environment.
Photo of Canadian flag and stethoscope courtesy of Shutterstock.
Photo of Stuart Elman courtesy of Persistence Capital Partners.