Happy Fri-yay Hubsters! Aaron here to help you wind down the week. Let’s get right into it with some insights for PE buyers. Then we’ll take a look at an interview with Long Ridge about its recent customer engagement software deal and highlights of our recent healthcare coverage.
Take private. Despite the broadly subdued M&A environment, public company sale activity for the first nine months of 2022 has remained mostly intact, finds Christina Bresani, head of corporate advisory for William Blair, in a new report.
Sale activity has only decreased 8 percent year-over-year, while broader M&A activity is down approximately 30 percent.
“There continue to be numerous noteworthy sales of US public companies across several sectors of the economy, with both private equity firms and a select group of strategics seeking to capitalize on the broader public equity dislocation,” she writes, pointing to the $1.3 trillion of global PE dry power available.
Strategic and PE portfolio companies are continuing roll-up and consolidation strategies by taking advantage of carve-out opportunities.
“When companies are evaluating ‘semi-core’ assets, there is an increasing inclination to designate assets as non-core, as the return threshold for corporates to invest in those sub-businesses has increased along with a more acute focus on cash preservation,” Bresani said.
Customer is always right. Customer engagement software is on the rise, and PE Hub’s Obey Martin Manayiti touched base this week with Long Ridge Equity Partners about the firm’s recent investment in Acqueon, a Dallas-based provider of omni-channel customer engagement software.
Obey spoke with Andrew Cedar, principal at Long Ridge, about how the ongoing migration to cloud-based software is opening up opportunities in this space.
“The world has evolved in terms of how people want to be communicated with, and the enterprise tech stack has not caught up with that,” Cedar said. “That is true across a very broad range of sectors and industries, and we believe the company is well-positioned to drive that and to enable organizations that want to evolve in that way.”
Cedar noted that understanding customer preferences is paramount.
“Consumers are much more discerning now,” he explained. “They don’t want to be bothered at the wrong time. They want to have the companies they choose to do business with fit into their lives, versus the opposite.”
You can read the whole story here.
Future of healthtech. Another interesting report hit my inbox this week, all about one of my favorite topics: healthtech.
Silicon Valley Bank released its 2022 Future of HealthTech report, which dives into the current investment landscape for healthtech companies and reveals that while numbers are down given the current macroeconomic environment, 2021 was a record-breaking year and last year’s market was the exception, not the rule.
A few things jumped out at me. The first is that investments are down but rebalanced from 2021 with shifts to earlier stages. According to the report, US, EU and UK healthtech investments hit $23 billion in the first three quarters of 2022, with an especially sharp drop in Q3 2022. Investments have shifted to earlier stages where valuations aren’t as inflated.
“With a record amount of dry powder available to healthtech startups, there is still tremendous growth opportunity with US and EU healthtech investments predicted to reach $27 billion by the end of the year,” said the report.
Secondly, the report notes that the IPO window shut, but M&A on the rise.
“Inflation, global geopolitical factors and interest rate hikes all created a tumultuous public market and shut healthtech’s IPO window. However, private PE and VC-backed M&A are up 16 percent versus the first three quarters of 2021.”
Last but not least, the report touched on mental health, noting that valuations and deal sizes up despite broader downturn.
“Mental healthcare demand soared this year, fueled by rising mental health conditions and growing provider shortages,” said the report. “Going forward, we expect to see more companies expand access to culturally competent mental health care and more companies expand access to mental health care.”
ICYMI. Speaking of healthtech, I’d like to resurface a few healthcare spotlight series profiles I did on PE firms earlier this year.
I spoke with EQT’s Eric Liu this past summer, where we talked where the firm likes to play.
“We do not invest in healthcare service providers like hospitals, nursing homes or physician practices, which are approximately 50 percent of the market, and which are the bread and butter of what other US healthcare private equity firms do,” he said. “The sub-sectors we like are med tech and life science tools, pharmaceutical services and healthcare IT.”
We also discussed the firm’s rigorous exit approach.
“The right strategy as a private equity investor is to constantly invest and constantly exit,” he said. “There are good deals done in every market. When markets are choppy, it just means you have less margin for error. But if you invest in good companies that you can improve through differentiated value creation strategies, you can generate superior returns for your investors over time. That is what we try to do.”
He told me the process for exits essentially looks like the investment process, but in reverse.
“The process is rigorous and consensus-driven, and notably, the decision is not delegated to the deal partner. I actually got rejected at the initial Exit Committee the last time I tried to start an exit process for one of my portfolio companies. It was frustrating at the time, and I had to do a ton of extra work to eventually get approval to start the sale process, but we ended up generating $2 billion of incremental equity value versus what may have happened if it was my decision alone.”
You can read the whole story here.
Earlier in the year, I spoke with Jim Flynn, partner at Deerfield Management Company.
Deerfield invests across all of healthcare; life science, healthcare services, medical technology and infrastructure (hospitals) and value-based care and drug discovery as well as at all points in a company’s life cycle. We discussed Deerfield’s role in the drug discovery field.
“There is an ongoing revolution that is occurring in drug discovery right now,” he said. “Every disease is a finite puzzle.” Like with a jigsaw puzzle, the approach is “to figure what the corner pieces of the puzzle are, and then you fill in the inside. The more pieces you have, the quicker the process goes.” Twenty years ago, genetic data was first gathered, and that started to provide the corner and edge pieces. Since then, “the middle has been started to fill in.”
He told me that the firm has partnerships with over 20 large universities, where the majority of new drugs are discovered.
“It usually takes 18 months to transact with them, but we have sped up the process so that we have relationships with the best hospital university systems,” he said. “Every drug since 2010 was invented by a university. We wanted to partner with the source of innovation. Hopefully that leads to a differentiated return.”
You can read the whole story here.
And please be on the lookout for the next installment in the series, which will be coming out next week. I’ll profile Welsh, Carson, Anderson & Stowe. I spoke with Brian Regan, who heads the healthcare team at the firm.
Please send healthcare tips and story ideas to me at firstname.lastname@example.org.
That’s a wrap for me! I will be taking a little road trip this weekend as well as soaking in the last baseball games of the year and hoping that the Phillies can come back and win this thing!
MK Flynn will be back with the Wire on Monday.
Wishing a wonderful weekend to all!