Healthcare industry problems spell opportunities for Wells Fargo Strategic Capital

‘To make outsized returns in venture capital or private equity, you need to be in markets where there's disruption happening, and healthcare is an industry that has lots of disruption,’ said WFSC’s John Ryan.

“One of the bigger challenges is the amount of capital chasing deals, and the fact that company valuations have gone up so much,” said Rodney Altman, managing director, healthcare, at Wells Fargo Strategic Capital. “We will see some kind of rationalization in pricing. However, I think there are going to be a lot of investment opportunities in great companies that need capital, and we’re open for business.”

Altman, who moonlights as a doctor in the emergency department of Stanford University Medical Center, and John Ryan, WFSC managing director and head of healthcare investments, spoke with PE Hub for our ongoing series profiling PE firms that invest in healthcare. Ryan has over 25 years investing experience and has been with WFSC for almost six years, while Altman has more than 20 years investing experience and clinical experience in emergency medicine and has been with WFSC for three years.

Challenges spell opportunity

“Over the last couple of years, we’ve seen some valuations that are hard to justify, based on any kind of reasonable metrics, so that’s been a bit of a challenge,” Ryan said. “Some of the industry-specific challenges are important as well. For example, in order to make outsized returns in venture capital or private equity, you need to be in markets where there’s disruption happening. Healthcare is an industry that has lots of disruption. In addition to the regularly occurring significant technological and business model innovation that drives disruption, there are also many challenges, such as medical staffing, the lagging adoption of information technology and inefficiencies leading to high costs, among many others, all of which need to be addressed.”

Ryan continued: “Given the aging and less healthy population, we need to be able to provide more care that is better and more efficient. All those factors combined with the fundamental value of health create loads of opportunities, which leads to opportunities for us to back emerging private companies that can solve those problems and typically do it better and faster than what some of the larger companies can do.”

Technical difficulties

“Healthcare doesn’t seem to adopt information technology unless it’s forced,” said Altman. “With the Affordable Care Act, we saw a broad adoption of electronic medical records across almost all hospitals and many practices. That created a basic infrastructure and database in the industry that can be built upon for many other uses.

“We’re also seeing processes outside of the clinical environment that are starting to get automated, which presents many great opportunities since healthcare is so far behind in digitalization of its processes compared to other industries, like finance,” Altman explained. “Everyone points to the fact that we’re still using faxes in healthcare – so, the digitization of healthcare processes will present ample opportunities for investment.”

Differentiator

“I think one thing that makes us unique is our flexible investing mandate that allows us to provide solutions to companies that can be more tailored than what other investors might do,” explained Ryan. “Most investors are looking to provide a certain kind of financial solution to a company, while we have the flexibility to provide whatever kind of financial solution makes the most sense for that company, whether that be equity or debt, or how we participate in it, the sizing of it, etc.

“Something else that makes us different is that we are part of one of the largest banks, which gives us access to a lot of resources that we can leverage to help our companies be successful,” he added.

Expertise is essential

“It is obviously critically important for investors to have expertise in whatever industry they are investing in, and that is certainly the case in healthcare,” said Ryan. “Not only does one need to understand the products, science, technology, etc, but also numerous other factors. A couple examples are the business models where there are frequently several parties to a transaction with different people selecting a product, having the product administered to them, paying for the product, etc. Also, understanding the motivations and incentives for the various parties. Healthcare is an industry with a lot of issues that need fixing, and those issues provide opportunities, but they also require expertise to navigate.”

In addition to the industry expertise, it’s important to have investing and company-building expertise, he added.

“One interesting aspect to that is I think funds that offer a certain kind of solution, such as middle market investors, think about collaborating with companies in a certain way,” Ryan said. “LBO firms and venture capitalists also each work with and think about companies in different ways. Similarly, equity investors and credit investors interact with companies differently. Since we invest across those dimensions of stage and structure, we can bring the best of those different philosophies to finance the companies with which we work and help them grow.”

Exit environment

“Some of the PE firms have either 8- or 10-year funds,” explained Altman. “And depending on where in the fund’s investment period the investment was made, they could be pushing a company to exit in as little as only three to four years. We’re not really bound by that kind of structure since we invest off the balance sheet and not out of a fund. This gives us more latitude and allows us to hold our investments until a time that is actually best for the company.”

Firm facts

Started in 1997, Wells Fargo Strategic Capital is the private equity and venture capital arm of Wells Fargo & Company. It is comprised of various capital solutions including non-control equity, private credit and investments in approved Small Business Investment Company. WFSC currently has more than $2 billion in committed capital and over 200 portfolio companies.

Acquisitions and exits

See below for details on recent acquisitions made by the firm.

On exits, WFSC exited 10X Genomics in September 2019 via IPO after initially investing in April 2018. The firm also exited Limelight Health in August 2020 when Fineos acquired it, after WFSC originally invested in December 2018.

WFSC’s portfolio highlights

(Dates refer to initial investment)

Array: A telemedicine company for behavioral health. (November 2020)

Atlas MedStaff: A nurse staffing company. (January 2022)

Cogitativo: A data science company providing insights to private and government health plans. (October 2019)

ConcertoCare: A tech-enabled value-based care company for the elderly. (December 2021)

Mangrove: A physician practice management company for vascular surgery. (April 2021)

MTM: A national provider of non-emergency medical transportation. (August 2022)

Sharecare: A digital health company that helps people manage all their health in one place. (June 2018)