Is healthcare recession-proof? Oak HC/FT’s Andrew Adams weighs in; plus WFSC’s healthcare investment strategy

Brookfield invests in music publisher Primary Wave.

Happy Fri-yay, Hubsters! Aaron here on the Wire, with what I hope is your favorite way to end the week.

Healthcare heartbeat. Hard at work on the healthcare beat, I checked in this week with Andrew Adams, co-founder and managing partner at Oak HC/FT, who shared his insights on a few topics, including the current dealmaking environment.

“There have been a number of strategics largely sitting on the sidelines over the past couple of years that are now super active,” he said. “They have a lot of cash, and they have a lot of strategic imperatives. I think you have the strategics that are the true kind of pure play strategics, then you have the sponsor-backed strategics. And they’re still incredibly active. So, there won’t be a slowdown there, as they are well capitalized. They need to grow; they need to acquire talent and add new growth channels. I think the overlay here is that healthcare is incredibly resilient and that it will continue to grow. The utilization of healthcare is not going away, and it is materially insulated from macro. And so that’s always going to be kind of a natural floor for exit valuations, just given the tailwinds that have decades of runway.”

There has been lots of talk of the R word recently, but many of my sources say that healthcare is recession proof. I asked Adams which subsectors are the most resilient in a recession.

“I think anything that is software driving efficiency,” he said. “If you’re a managed care company – can I process claims more accurately and faster? If you’re a hospital system – can I operate my call center more efficiently? If you’re a pharma company – can I develop this drug for you faster and for less money? These are major pain points that have nothing to do with inflation or recession. And the demand for these efficiencies is not slowing down. You would actually point to an accelerant. For example, if there’s wage inflation, you’re looking at, how do you make your labor stretch farther? How can you do more with the same, not do more with less? And, if you’re getting price pressure, then you need to make it up on margin. So how do I use software to run more efficiently? That’s where I think true value can be demonstrated.”

Life is not easy for investors with all the macroeconomic challenges, so I asked Adams what keeps him up at night?

“I just think management teams have gone through an incredible amount over the past couple of years,” he said. “I’m talking specifically to healthcare services, you’ve had a war for clinical talent, you’ve had to manage wage inflation, you’ve had multiple waves of the pandemic. You’ve been on the frontline providing care in a very stressful situation, while you’ve been trying to run a company, where you have a lot of difficult dynamics with your own workforce, right? That’s your asset, your asset is your clinical delivery model and the people driving it. And when your clinical delivery model is under stress from wage inflation or attrition or recruitment, then there’s a cascading effect. I really think we’re emerging from that dynamic, but you now could be potentially facing an inflationary and recessionary environment. That is just a lot, even for the best teams to manage through. We’re asking a lot from these folks. And as an investor, it’s your job to be as supportive as possible.”

Adams explained that it’s not as simple as being there on the other end of the phone or Zoom.

“It’s asking what services and help we, as a firm, can provide our portfolio companies and I think that’s just incredibly important for any investor right now. Everyone has high expectations for their portfolio companies but what are you doing to help through this next phase? That’s where we invest a lot of our time and attention with the portfolio – helping find the best talent, accelerating a customer sales or product development cycle, leaning on our decades of experiences through many cycles to provide advice, trying to be a problem solver.”

Earlier in the year, I profiled Oak HC/FT for PE Hub’s series on PE firms investing in healthcare, and you can check that out here.

Problems spell opportunity. Speaking of our series on PE firms investing in healthcare, yesterday I profiled Wells Fargo Strategic Capital. I spoke with Rodney Altman and John Ryan, both of whom are managing directors on the healthcare team.

“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.”

Read the whole story here.

This week, our colleagues at PE Hub Europe attended two conferences in London: Private Equity International’s Investor Relations, Marketing & Communications Forum: Europe and the BVCA Summit.

For highlights of those events, be sure to check out Nina Lindholm’s wrapup in today’s Dealflow, PE Hub Europe’s daily newsletter.

And while you’re at it, sign up for PE Hub Europe and Dealflow.

Something to sing about. Brookfield Asset Management is joining with independent publisher Primary Wave Music in a $2 billion deal to invest in music copyrights, the companies told the Wall Street Journal.

“The deal also brings on Creative Artists Agency as a strategic partner and minority investor in Primary Wave, tapping the talent agency’s film, television, theatrical and branding teams to help market and find uses for the acquired copyrights,” the paper reports. “Already, the new outfit, which the companies say has several deals in the pipeline, has acquired a majority stake in all of punk icon Joey Ramone’s music-publishing assets for around $10 million, according to people close to the transaction.”

We’ll stay tuned to that one.

Back in September, my colleague Iris Dorbian did a deep dive into private equity investing in the entertainment sector.

You can read her story here.

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As always, you can reach out to our fearless leaders MK Flynn at mk.flynn@peimedia.com.
Before I sign off, I want to give a big thank you to THL Partners, who hosted another healthcare focused discussion over dinner. It was great to chat with THL CEO Scott Sperling (who is also the chairman of Mass General Brigham hospital), managing director Shahab Vagefi and managing director Sam Hendler, just to name a few.

I covered THL’s hiring of Hendler earlier this year. You can read the story here.

That’s it for me! As a former baseball player, I am very excited to watch Wildcard Weekend!

Also, congratulations to the New York Yankees’ Aaron Judge on hitting No. 62!

MK will be back with the Wire on Monday.

Wishing everyone a good weekend!

Cheers,
Aaron