Healthcare operating challenges lead to abundant opportunities for WCAS

The opportunity to operate more efficiently is driving increased investment in technology, said Welsh, Carson, Anderson & Stowe's Brian Regan.

“Most healthcare providers are experiencing both wage inflation and labor shortages, and their input costs are going up while their revenue per unit is constrained,” explained Brian Regan, head of healthcare group and general partner at Welsh, Carson, Anderson & Stowe. “Volume and mix have also become less predictable post-pandemic. Those are real operating challenges, but they also provide opportunities in the form of technology enablement and value-based payments.”

PE Hub spoke with Regan for our ongoing series profiling PE firms that invest in healthcare. He discussed the types of investments the firm likes to make, how the firm goes about positioning healthcare assets and dealmaking with the current market dynamics.

“Value-based care doesn’t necessarily mean full capitation – it could mean bundles for certain episodes of care or payment for certain quality or cost outcomes,” he said. “That’s a substantial opportunity, as the market is evolving to provide more incentives for physicians to take care of patients more effectively and more efficiently. This combination of input cost pressures and the opportunity to operate more efficiently and capture more revenue, including through these VBC arrangements, is driving increased investment in technology. So, in [healthcare IT], we’re seeing opportunities for technology to help healthcare companies better recruit, retain and develop employees, to optimize staffing, to leverage their data and to create a better patient experience.”

Enabling capabilities

“The science driving biotech innovation is really exciting, with new monoclonal antibodies, antibody drug conjugates and cell and gene therapies all holding significant promise,” he said. “That trend is going to be transformative for healthcare over the next 10 or 15 years, and there’s a whole set of enabling capabilities that drug sponsors need to bring these new therapies to market.”

He added that HCIT continues to be an opportunity for WCAS to leverage both the firm’s healthcare and tech franchises.

“Our latest investment there is in Norstella, a leader in the biopharma data and technology space, so it’s also a way to play on a derivative basis that same biopharma industry thesis,” he said. “Finally, we are seeing a lot of opportunity to invest alongside health plans in companies that help manage specific conditions, provide ancillary benefits or enable them to reach new members.”

Building businesses the right way

“One challenge we think about a lot is the misperception of private equity that exists in healthcare, and principally that it is just cost-focused and not concerned with quality or patient experience,” said Regan. “There will always be negative anecdotes that folks can cherry-pick, just like if you ever watch the local evening news, it’s all fires and car crashes, but that doesn’t define everyday reality for most people.”

Regan said that the PE industry is more innovative and growth-oriented than is generally understood.

“WCAS’s returns, like most of our peers, are driven principally by revenue growth and the benefit to valuation multiples that comes from owning larger, often more diversified businesses on exit vs. entry,” he said. “We’re incentivized to build businesses the right way, since having a successful, sustainable enterprise at exit is the most important determinant of your liquidity options and valuation multiple. Given the amount of scrutiny our companies face in due diligence when we seek liquidity, whether that’s a sale to a strategic, another investor or an IPO, WCAS’s focus is on building growing, successful companies that have all the capabilities needed to support that well beyond our hold period.”

Multiple compression

“Multiples for publicly traded healthcare stocks have declined almost across the board in 2022, and many VC or growth-backed companies that raised money at the peak of the market would not be able to replicate those valuations today,” said Regan. “However, in the private equity market, we’re seeing more of an effect on deal flow right now. If many private healthcare companies had to trade today, they almost inevitably would see multiple compression.”

He noted that, historically speaking, multiples tend not to compress as much as deal activity declines, at least initially.

“Then as market conditions normalize and support valuations that are consistent with the precedents, broader deal flow will resume closer to where it left off in terms of valuation multiples,” he said. “That is why multiples in the private markets have tended to be more stable with an upward trend over time.”

Firm facts

Founded in 1979 and based in New York, WCAS invests in technology and healthcare. The firm’s strategy has been to partner with outstanding management teams and build value for its investors through a combination of operational improvements, growth initiatives and strategic acquisitions. WCAS has experience in acquiring founder-led businesses and corporate carve-outs. The firm has raised and managed funds totaling over $27 billion of committed capital.

Acquisitions and exits

“Many of our investments are made alongside large publicly traded companies, so there is often a natural buyer already in place,” said Regan.

He added that generally speaking, the firm’s hold period averages about five years.

“Our investment horizons can stretch quite a bit longer than that, especially in situations where our capital has been invested over several years to build the company,” he said. “On exits, WCAS has the philosophy that if you build a great business that has strong fundamentals in an attractive market, it is going to have multiple exit options. The benefit of being a long-term investor is that if the macro conditions aren’t right for a sale or IPO, which is more of the case today, then we have the flexibility to hold these businesses and continue to grow them until the timing is optimal for us to get liquidity.”

WCAS has realized seven exits in the healthcare space since 2021.

In September, the firm agreed to sell its remaining stake in specialty pharmacy integrator Shields Health Solutions, to Walgreens Boots Alliance. The size of the deal is about $1.37 billion, and it is expected to close by the end of the year.

Other exits include:

Exited Norstella in October 2022 after investing in November 2018. The company merged with a private equity-backed strategic buyer.

Concentra in December 2021 after investing in June 2015. The company was sold to public company Select Medical.

Kindred Healthcare in December 2021 after investing in July 2018. The company was sold to LifePoint Health.

Springstone in October 2021 after investing in October 2010. The company was sold to public company Medical Properties Trust.

Kindred at Home in August 2021 after investing in July 2018. The company was sold to public company Humana Health.

US Acute Care Solutions in March 2021 after investing in May 2015. The company had shared repurchased.

Partially exited InnovAge, Inc. in May 2021 after investing in May 2015. The company was partially sold to another PE firm followed by IPO.

WCAS’s portfolio highlights

(Dates refer to initial investment)

CareSource Management Services: A management services organization (MSO) for Medicaid-focused managed care plans in partnership with CareSource. (June 2020)

CenterWell: Value-based primary care centers focused on the senior population in partnership with Humana. (March 2020)

EnableComp: A revenue cycle company specializing in the management and resolution of complex claims for health systems and physician practices. (July 2021)

Kiniciti: An integrated drug discovery and development technology and services company that focuses on iPSCs and their applications for both R&D and novel cell therapies. (November 2021)

Leiters: An FDA-registered 503B outsourcing provider of compounded sterile preparations serving hospital systems, ASCs and physician practices. (November 2021)

Liberty Dental: A dental benefits management company in partnership with Elevance. (Pending)

Shields Health Solutions: A specialty pharmacy program provider in partnership with health systems. (August 2019). See above for details on sale expected to close in 2022.

United Musculoskeletal Partners: A provider of musculoskeletal care and related ancillary services in partnership with orthopedic surgical practices and health systems. (December 2021)

Valtruis: A value-based care health company. (May 2021)