- PE giant opportunistic when it comes to sectors
- Relationship-building a key deal-sourcing element
- August buys: Envision unit, Covenant, PharMerica
Jim Momtazee leads the healthcare investment team at KKR, one of the most active buyers in the sector in recent weeks.
How has KKR’s healthcare investing strategy evolved over the past five years?
The biggest change for us would be the broadening of our focus. The distinction is partly around size. The team is about three times the size it was five years ago and what that’s allowed us to do is increase our aptitude and network for sourcing and diligence — and also to make better decisions.
Themes to us are one tool of many. We have an overlay of actionability, an overlay of value and an overlay of the idiosyncrasies in a given deal.
In a deal today we’re likely going to need to ride it through a cycle, like we did the last cycle going back 10-plus years ago. You want to buy companies that have a secular growth story that keep compounding over multiple years. We also like deals where acquisitions are a key part of the value.
It’s more characteristics of companies as opposed to saying “this sector or that.” We like to remain highly opportunistic as it relates to sectors.
How do you source your deals?
We by design cast a really wide net, with the thesis being the more we see, the more likely we are to see the ones that catch our fancy. We see things both in and outside of an auction.
We really do spend an enormous amount of time building relationships with these companies. We’re building those relationships to be prepared for an opportunity. When it comes time to act, we’re making a decision on an opportunity where we think we can grow the company beyond what others can see.
The point is: If we’re looking at a scenario that is different than others can see — whatever the catalyst might be — we’re likely able to pay the highest price and we win for that reason.
How do you view risk?
We’re intently focused on capital preservation. There’s a threshold level of risk beyond which we’re not willing to go. If we think the risk of capital loss is above a fairly low threshold we would just look for different opportunities. There’s a difference between actual risk and perceived risk, and that’s a little bit of what we try to exploit.
One example is Air Medical, an air ambulance company we bought about 2 1/2 years ago. It was a complicated business and one where you really need to understand how healthcare regulation and reimbursement works. Once you understand those things, it’s a real gem-providing, critical-mission business.
Where are we in the cycle from a deal-valuation standpoint?
We’re clearly at the higher end of the range. The nice dynamic about the markets today is that high multiples beget high-quality sellers and it begets high-quality businesses. The asset quality can be very high in terms of what’s available.
The approach you’re going to bring is a different one, and a big part of this is understanding where you are in the market. When you look at average multiples or anything like that, it’s really not that relevant. We’re not doing the average PE deal. We’re stock pickers in that regard. If you’re going to meaningfully build the earnings, double or triple them, it’s always with a bit of hindsight [that you look at valuations]. The burden, then, is on finding things where the asset quality is really high and where you can really grow it. Our job is to find those ones.
What challenges does KKR face both internally and from a competitive standpoint?
We’re as good as our people. We’re a human-capital business. It’s relationship-building, asset selection, working effectively. If we’re trying to build a business in the long-term — and we are — that stuff is critically important. I spend a huge amount of my time mentoring, training, recruiting and developing the talent.
It’s a competitive market but it’s been a competitive market for the 20-plus years that I’ve been involved. There’s ones that we lose badly on and maybe there’s a brief moment of frustration. But I’m still very bullish that we can find really high-quality companies that we can find really good returns on. I??™m optimistic.
Action Item: KKR’s latest healthcare investments: pehub.com/buyouts/kkr-on-a-healthcare-tear-builds-medical-transport-giant/
Photo of Jim Momtazee courtesy of KKR