Healthcare deal spotlight: Why Morgan Stanley Capital Partners picked SpendMend

Morgan Stanley Capital Partners, the private equity team within Morgan Stanley Investment Management, announced on March 2 that it had raised $2 billion for North Haven Capital Partners VII. The fund, which invests in companies in the business services, consumer, education, healthcare and industrial sectors, exceeded its original fundraising target and surpassed the size of its predecessor fund by more than 40 percent. MSCP also announced its acquisition of SpendMend, a provider of tech-enabled offerings aimed at optimizing the cost cycle for the healthcare industry, marking the fund’s sixth investment.

PE Hub spoke with Steve Rodgers, managing director at Morgan Stanley and a partner of MSCP, and Aaron Sack, head of MSCP, about the new fund, SpendMend and the trends in healthcare.

MSCP has spent a lot of time on cost cycle management for providers who are “getting squeezed” as healthcare costs rise, Rodgers said. “There is pressure on revenue, and costs are going up at the same time; reimbursement is shifting to value-based methodologies that put hospitals at risk, and they often do not have good information on what it costs to perform procedures.”

Overpayments and contract compliance errors are problems hospitals face, in part because conflicting data exists in multiple places.

“We have looked at a series of companies over the last four years, which provide various tech-enabled offerings that help hospitals address these huge problems, which have only become more acute since the covid crisis emerged,” he said.

Enter SpendMend, a developer of software that provides audit recovery, cost containment, analytics and spend visibility. MSCP has been tracking SpendMend for quite some time, and the firm was already prepared to pounce when it came to market.

“We had already done a significant amount of work and were ready,” Rodgers said. “We had positioned ourselves with two great executives and had built out a database of target add-on acquisitions. It was a business we knew we wanted to own, so we acted quickly to build an investment case and make the investment.”

According to Rodgers, SpendMend is already experiencing “attractive organic growth across the business,” with the company’s core profit recovery division having some nice long-term tailwinds as well as the more recently added product offerings in the pharmacy and medical device implant areas.

“We are fortunate the company has strong organic growth already, but we can augment that with add-on acquisitions,” he said.

The firm sees the opportunity to leverage the relationships and trust SpendMend developed in the CFO and supply-chain parts of the hospital to add capabilities.

“We have an active target acquisition list that we built prior to the investment that contains companies with solutions that will be complementary to [SpendMend’s] current offerings and help to further bolster the position they have in the CFO suite today.”

Hospitals are facing increased work force challenges, further exacerbating conditions that lead to duplicate payments and other cost cycle errors that SpendMend finds and recaptures.

“Supply-chain pressures and inflation are unfortunate aspects of the overall economic environment today, but they are tailwinds for SpendMend,” Rodgers said. “Anything we can do to help hospitals save costs at this time is absolutely critical for them.”

MSCP has been working with management on a value creation plan to develop key levers that will drive additional growth. “We see opportunities, such as investing in expanding our salesforce and in technological solutions, which will yield greater savings for our customers,” Rodgers said.

The deal was underwritten to the firm’s typical five-year investment horizon, but the timeline could be shortened. “In a number of cases, we have been able to achieve some of these value creation initiatives early, which results in the achievement of our five-year plan several years early,” he said. “When this occurs, we have been able to exit the investments early.”

About the new fund, Sack said: “We are in growth mode, going from a $1.4 billion fund to a $2 billion fund. We scaled our team and operating partner strategy significantly over the years, and we now have the capacity to invest this fund as well as larger funds in the future.”

The fund is already about halfway invested. “The first deal in the new fund was US Health Connect, which was completed sometimes even outside in people’s backyards during the pandemic,” Sack said. “We were active in both investing and exiting over the past two years of fundraising and that puts us in a good position to deploy the rest of the fund; most likely over this year.”