Five Questions with Adam Feinstein, founder of healthcare-focused Vesey Street

"We’re investing in healthcare services companies in the Ebitda range of $5 million to $30 million that offer meaningful growth opportunities."

Adam Feinstein is founder and managing partner of Vesey Street Capital Partners, a New York healthcare services firm that launched in 2014.

How would you characterize Vesey’s investment strategy?

We’re only looking to swing at things in our sweet spot. We’re investing in healthcare services companies in the Ebitda range of $5 million to $30 million that offer meaningful growth opportunities. We’re looking for businesses that are typically founder-led or a corporate carve-out, have very low capital intensity and high barriers to new market entrants. We’re only investing in things with limited reimbursement risk. These are businesses that service hospitals, physicians and payors. In addition, any sort of service serving pharma manufacturers is a great business to be in. The incremental benefit of selling more drugs drops right to the bottom line.

What are some examples of Vesey investments that reflect this strategy?

One example is HealthChannels (parent of ScribeAmerica), which is in the epicenter of helping hospitals and doctors run their businesses more efficiently. The medical scribe business is a high-skilled, low-cost labor solution that leads to, I’d argue, workforce innovation. Consumerism and wellness is another theme we like as patients control more of the healthcare dollar. We have an investment in Elite Body Sculpture to capitalize on that.

Which underlying industry trend are you most focused on right now?

We’re focused on the payors. The big continue to get bigger: UnitedHealthcare, Anthem, Cigna, Humana and Centene. They’re all doing more and more deals and continue to grow. Not just in terms of their core business, but in government-run plans including Medicare and Medicaid, and into new areas. I don’t see that trend changing, and that’s important for a few reasons.

The managed care payors continue to control more lives of hospitals and physicians. The payors continue to have a lot of influence in terms of creating new networks and in terms of reimbursement trends. Clearly, payor significance in the market has gone up. The balance of power is shifting. At the same time, the ability to sell services to payers is very appealing. As payors get bigger, they need help running these services. Payor outsourcing is one of our top areas of investment right now. It’s a strong business model, the trends are very stable, and we think the valuations are reasonable relative to the growth potential.

How are hospitals and physicians responding to payor trends, and how is this lending to opportunity for investment?

These business models are changing dramatically. Providers have to deal with a much bigger customer group and have to create more value. As the balance of power has shifted to payors, having local market share really matters for providers. Providers are creating platforms so payors can offset some of the risk. They need to be equipped to do that.

Most providers are just trying to survive in this market, which is why we’re seeing so much consolidation of doctor practices. This M&A consolidation will continue to be prevalent as you have significant access to capital and low interest rates. To be one provider or payer of one solution: it’s not going to work. Scale matters more than ever before. Because of this, hospital outsourcing is another area we like. As hospitals continued to struggle with uncertainty in Washington, they need to outsource more.

Are there any healthcare trends or areas of hype that you’re skeptical about?

We’re not as constructive on physician practice management. Things have gotten very frothy. By definition, it’s a tough business model to invest in, unless you’re a hospital system or surgery system and you have a more integrated strategy. In the mid-90s we went through a similar cycle and it didn’t end well. I do worry about history repeating itself. We have enough gray hair from being in this industry long enough. There’s also a lot of hype around artificial intelligence and really any tech solution.

Healthcare is transitioning to a value-based care system, but in terms of tech disrupting or changing healthcare, we’re certainly a long way off from big changes. Technology around the revenue cycle or medical coding has promise, but replacing physicians with computer-assisted systems? It just has no promise. People are throwing around AI loosely.

At the same time, everyone’s worried about Amazon, but so far their focus has been predominantly on selling healthcare supplies. The trends have actually been favorable in pharma distribution, specialty distribution and some adjacencies. And the valuations are attractive.

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