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Inside the deal: GTCR eyes add-ons for new life sciences platform PathGroup

“We have identified a number of potential acquisitions and we have a nice pipeline,” said GTCR's Sean Cunningham.

GTCR recently made a majority investment in PathGroup Holdings, an independent laboratory that provides anatomic pathology, digital pathology, molecular diagnostic, and clinical testing services to physician groups and hospital systems across the Southeast and Midwest. PE Hub spoke to Sean Cunningham, managing director and co-head of healthcare at the firm to learn more.

PE and VC firms have been teaming up more recently and this is the second deal in the past few weeks where a PE firm has made an investment in a life sciences firm, the other being Apollo agreeing to take a minority equity stake in Sofinnova Partners, a European life sciences venture firm.

GTCR has known both Ben Davis, founder and CEO of PathGroup, and Dave King, former chairman and CEO of Labcorp, for years. King will join the PathGroup board as chairman.

“We have known the PathGroup since 2014 when we were initially introduced to Ben Davis and we’ve dialogued for a while, so it’s nice to ultimately make an investment in the business,” he told PE Hub.

“We have also known Dave King for more than a decade, and this investment culminates a nice marriage of relationships.”

GTCR deploys “The Leaders Strategy” approach to most of its investments and this latest deal is no different.

“We are so focused on the quality of the management team, given our Leaders Strategy approach; it’s a big part of what we do as a firm,” he said. “PathGroup found a nice niche in the market, with a focus on both quality and service, so it’s grown really nicely over the years.”

Sean Cunningham, GTCR

Cunningham called it “one of the largest independent labs” focused on anatomic pathology, digital pathology, and molecular diagnostics, as it does “quite a lot” of clinical work for physician practices and health systems, as well.

“Diagnostic volumes have been high given all the covid testing, but that will slow,” he said. “They are in the process of building a new large lab outside of Dallas and that is part of the reason for the recap – to help them finish and grow that facility in Dallas, which we think will be a real game changer.”

GTCR is going to be very focused on inorganic growth with this investment.

“In the pathology, molecular and genetic diagnostic space there is so much fragmentation,” he said. “The clinical space is relatively consolidated with Quest and LabCorp but there are a lot of independent labs doing specialty work and we think there is a nice opportunity to partner with additional physicians and make a bunch of acquisitions in the independent part of the market.”

The firm has a list of businesses it wants to target for add-ons.

“We have identified a number of potential acquisitions and we have a nice pipeline,” said Cunningham. “For most of our deals we are putting in more capital over time to support both organic and M&A levers, so we expect that to be the case here as well.”

He noted that as reimbursement has changed over the last decade in the healthcare field, it has made it “a little tricker to invest in diagnostics.”

“Most of that impact has been on Medicare rates, but it has had some impact on commercial payers, which has probably contributed to lower deal volumes in this space,” he said. “Covid drove a lot of diagnostic testing volumes. In many ways, it is also brought renewed focus on the diagnostic market, and I think it will drive innovation in testing technology. There will be innovation in both the tests themselves as well as the laboratory work to process those tests and diagnose diseases.”

GTCR has control since they are now the majority investor, as the management team, investing physicians and Pritzker Private Capital all made significant rollover investments with PPC; and Vesey Street Capital Partners will also be retaining a minority ownership stake.