FFL’s Karen Winterhof: slow, banker-driven dealflow makes proprietary opportunities more important

'Demonstrated ability to improve patient outcomes while helping to take costs out of the system will be key for us.'

To gain insights on the current climate for private equity deals, PE Hub and PE Hub Europe reporters have been asking a wide range of sources to share their outlooks for 2023. Our series continues now with this healthcare focused edition, featuring Karen Winterhof, a Partner at FFL Partners. She joined FFL in 2015 and focuses on the firm’s healthcare services investments.

What were the highlights of your healthcare dealmaking in 2022?

One of our highlights was investing in Perlman Clinic, a primary care business operating in Southern California.

As part of our Sector Exploration and Expertise Development (“SEED”) process, we’ve had a proactive focus on At-Risk Primary Care since 2018 and have met with primary care practices across the country. We decided to partner with Perlman Clinic since we were particularly impressed by their clinical model and tech-forward patient experience.

The investment is off to a great start, with organic growth over 20 percent in 2022 and some exciting near-term growth plans.

What was the biggest challenge to completing healthcare deals in 2022?

Labor supply issues were a key question in many healthcare services deals we looked at last year. Businesses that have established a unique culture and ability to recruit talent, like Perlman, really stood out.

We have also found a growing disconnect in valuations between buyers and sellers in the last six months. With the significant change in credit markets, rising inflation, and labor market challenges, there is increased uncertainty around valuation. We worked on several opportunities where that shift just had not yet met the seller’s expectations. I think that gap, along with the deteriorating credit markets, led to several stalled processes in 2022.

How do you expect the first six months of PE dealmaking in 2023 to compare with the last six months of 2022?

It feels like banker-driven deal flow will likely remain slower for the next few months, but we are still seeing interesting companies in our pipeline, including some proprietary opportunities coming out of our SEED process.

We have seen some direct lenders become more active on the new deal front compared to Q4 2022, but we still need to see more supportive credit markets for deal volumes to pick up meaningfully.

What will be the most important trends affecting your healthcare dealmaking in 2023?

Stable and growing demand is a key part of our investment theses across healthcare services and pharma services. Given the environment, we’ll be scrutinizing demand outlook even more this year. We are growth-oriented investors, so we focus on investing in subsectors with secular tailwinds.

A business’s demonstrated ability to improve patient outcomes while helping to take costs out of the system will be key for us. Given where healthcare is evolving, it is critical for our businesses to make the system more cost efficient and at the same time improve the patient experience.

What’s keeping you up at night?

We are sleeping reasonably well. Our portfolio is holding up relatively well and our SEED process continues to identify interesting investment opportunities. We do remain focused on labor inflation trends, the impact to cash flow of higher interest costs and the state of the debt markets as we come into 2023.

What are you looking forward to most in 2023?

Hopefully, we can continue the momentum in our portfolio. Fortunately, our healthcare investments have generally performed very well, averaging 20+ percent growth in 2022. We have excellent management teams helping us navigate the choppy waters, and our operating partners have been a critical part of that performance as they remain quite active in the portfolio supporting our management teams.