Healthcare: GPs avoid auctions, sellers sharpen processes

As capital continues to flood into the healthcare market, traditional PE buyers are increasingly looking for ways to preempt formal auctions while sellers are opting for more focused processes, sponsors said at the Jefferies 2017 Healthcare Conference.

More family offices, European funds, LP direct investments and consumer-focused investors are contributing to what has become a hypercompetitive healthcare universe.

According to several panelists, strong relationships and a focused investment approach are keys to remaining competitive. The Wednesday panel, Trends of Private, was moderated by Jefferies’s Michael Dodds, managing director for healthcare investment banking, on June 7 at New York City’s Grand Hyatt.

Getting ahead on trends

Getting ahead on secular trends in specific subsectors enables Warburg Pincus to move quickly when an opportunity emerges, TJ Carella, a managing director at the firm, said. “The world is definitely moving in this direction of these preemptive processes,” he said.

Just last week, for example, TPG Capital’s Mediware Information Systems preempted the William Blair auction for home-health-software company Kinnser Software, Buyouts reported.

For Warburg, the secular story around Medicare and Medicare Advantage remains compelling in light of bipartisan support, while digital and mobile technologies serving patients and vertical SaaS are also priorities, Carella noted.

“We are a thesis-driven firm,” Carella said. “We think that gives us an edge because it enables us to get out and meet companies and be top of mind.”

Credibility is also a vital part of seizing opportunities. This was highlighted in the latest deal from Harvest Partners, an active investor of multisite clinical business. The New York PE firm bought EyeCare Services Partners from Varsity Healthcare Partners just a couple weeks ago.

Varsity was prepared to run a formal auction after tapping Jefferies for advice, but an attractive offer from Harvest preempted the move, two sources said at the time.

“Getting out in front of these assets early puts us in a position where we can put something compelling in front of them,” Harvest Senior Managing Director Jay Wilkins said on the panel.

“Being a part of a more narrow process is certainly a more attractive thing from a buyer perspective,” he added. “You have to have the credibility to be one of those five people who gets approached.”

Price not always key factor

While winning a deal outside of an auction may sometimes mean paying a higher multiple, that’s not necessarily a bad thing, panelists said.

“That last multiple turn of price probably is not what makes it a good deal or bad deal,” Jeremy Gelber, a partner at Pamplona Capital Management, said. “If it’s a great business, it’s worth paying that last multiple turn in price to get out ahead of it and not have to go into a broad process.”

Aside from deep industry expertise and the offer price, relationships are also key to winning deals, the panelists agreed.

“The one thing that hasn’t gone away,” Warburg’s Carella said, “is the importance of building rapports with management teams. You shouldn’t underestimate the importance of getting that right in a deal dynamic.”

Relationships with other PE firms are also increasingly important, Carella said. Trust that you’re going to work together well on a board is important, he said. “That goes a long way to position you as a buyer.”

Action Item: Harvest’s portfolio:

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