Not your everyday healthcare investor: Wellspring finds value in misunderstood assets

Wellspring – whose less than decade-old healthcare platform has produced a roughly 50% IRR to date – has found its sweet spot fishing where others are not.

In an industry fraught with competition, Wellspring Capital Management has built a stout healthcare franchise from scratch over the past decade by backing businesses often overlooked by its peers due to complexities around reimbursement, regulations or operations.

It is a strategy that is already paying off. Over the past nine years, Wellspring has executed $4 billion-worth of healthcare transaction value through six platforms and more than 30 add-ons. The portfolio has produced a roughly 50 percent gross IRR to date, accounting for some recent investments, according to a source close to the firm.

Most recently, it exited Help at Home, which commanded an approximately $1.4 billion valuation when Wellspring sold a majority stake to Centerbridge Partners and Vistria Group, PE Hub wrote in August. The deal – one of private equity’s largest and most high-profile home care transactions in the past 12 months – has so far produced a high single-digit return for Wellspring, the source said. Flash back six years ago, when Wellspring invested, the non-medical side of home care, where such companies assist seniors with daily living activities, was not viewed to be an important part of the post-acute ecosystem – which it has clearly proven to be.

Healthcare is now 40 percent of Wellspring’s latest vehicle, up from zero representation in 2011. The 20-year-old firm over the past decade has created a healthcare portfolio that managing partner and co-president Alex Carles likened to a “fund within a fund,” not unlike its slightly smaller umbrella of packaging investments. 

Wellspring continues to allocate more resources to its healthcare platform. The effort includes the recent addition of Meghan FitzGerald as a senior advisor to its healthcare team. FitzGerald is a former Cardinal Health executive and current and past board member at various companies including Tenet Healthcare.

Dislocation catalyst

The New York firm’s first foray into healthcare was through its 2012 investment in National Seating & Mobility, a maker of customized wheelchairs for long-term mobility loss. Other investments include home health business Great Lakes Caring and Center for Diagnostic Imaging. It’s latest bet, HealthPro Heritage, provides contract therapy services to skilled nursing facilities and other post-acute settings. 

“These are all leading businesses in individual sectors, but at various points of time, those sectors weren’t the most attractive to people,” said Naishadh Lalwani, a partner who co-heads Wellspring’s healthcare effort with Carles. “We’ve been willing to roll up our sleeves and get comfortable with certain issues and themes at moments in time where others haven’t.” 

Carles characterized the playbook as “relative value” investing. He explained: “What we’re trying to do is make sure we do the upfront heavy lifting to figure out: is this systemically important? Is this going to help the system manage costs efficiently? Is this going to lead to the best patient outcomes?”

In other words, dislocation can create a catalyst for consolidation, presenting opportunity for strong operators led by quality management teams to thrive in markets with complexity, Lalwani said.

The firm has seen this play out at portfolio companies like Help at Home and plans to replicate the strategy at investments including HealthPro.

In recapitalizing HealthPro in March, Wellspring – like its peers – recognized the attractiveness inherent in physical, occupational and speech therapy, a space that has pulled in significant capital over the past several years. But it also believed HealthPro was coming at the market from a different angle.

“The market loves therapy and we like therapy, too,” Lalwani said. “They [HealthPro] are doing exactly what those companies are doing, but instead of doing it in an outpatient setting that’s paid with commercial insurance, they’re doing it in a nursing home, or senior living facility or sometimes in home itself, but it’s reimbursed by the government.”

The strategy behind HealthPro is two-fold. Half of the business focuses on high-growth markets including home health, pediatric and senior living settings; the other half serves skilled nursing facilities, an end-market not revered by many. Although the overall SNF market may struggle, Wellspring through its analysis feels confident HealthPro is aligned with the right high-quality customers to overcome any market risk.

HealthPro’s track record gave Wellspring further conviction. The Hunt Valley, Maryland-based company has grown every single year in the past decade despite the economic or reimbursement climate and it is on track to generate $50 million-plus of EBITDA in 2021, the source said.  

By getting educated on businesses in sectors competitors consider less appealing for one reason or another, Wellspring can also take advantage of lower entry multiples. For example, its investment in HealthPro was done at a high-single-digit EBITDA multiple – below the 12x to 14x range at which typical outpatient physical therapy companies trade. “In most sectors, this company trades at a healthy double-digit multiple, but in this case, people get really hung up around skilled nursing,” Lalwani said.

To be sure, it’s about finding assets misunderstood, not about looking for low prices. “What’s critical is the real discipline around not falling prey to adverse selection,” Carles said. “There are so many sub-sectors in healthcare we avoid because we think systemically it’s not going to be sustainable in terms of reimbursement or a place in the system.”

At the same time, Wellspring also makes a point to avoid the “flavor of the month” – doing its best not to fall victim to healthcare’s herd mentality. “Everyone is afraid of missing out and we’re trying to do the opposite,” Lalwani said.  

Outpatient acceleration

That said, Wellspring like many investors is a big believer in the movement from acute settings to outpatient settings. With covid-19, the rationale driving this shift in care has only been magnified, investors told PE Hub.

Consider Wellspring’s radiology platform. Center for Diagnostic Imaging was initially impacted through covid amid the stalling of non-elective procedures, but then, an interesting phenomenon fueling a strong recovery occurred. Doctors who formerly were unwilling to test out new care settings or who referred patients to hospitals largely out of habit have since had to pivot, Lalwani explained.

“Now for the first time they [doctors] have no choice but to try out the outpatient setting,” he said. “And I think they’ve been really surprised at the results.” 

Although fueled by covid, this shift in mindset should be a long-standing tailwind for outpatient providers like CDI, the investors believe. 

CDI, which operates a network of outpatient MRI and CT imaging clinics, now projects $110 million-plus in EBITDA this year on the heels of robust organic growth and M&A activity through covid. The company also recruited a new CEO, Kim Tzoumakas, former CEO of 21st Century Oncology. 

Whether it’s through products or services, Wellspring believes the non-acute setting will only grow more important. “We have a view that the acute space is going to be challenged for a long time because just like people learn to work at home, they’ve also learned to receive services at home, or at least in a non-acute setting,” Carles said. “If you can go to a strip mall or a standalone center, it’s much more approachable, and frankly, it’s more favorable for doctors as well.”

Lalwani added: “America is aging at a rapid pace and we’re going to need to find cost-effective solutions to improve our current healthcare capabilities to meet the challenge. The care providers that are able to innovate and improve quality standards are going to win and that is our target universe.”

Correction: This report has been updated with the correct spelling of Naishadh Lalwani’s last name in three mentions.