THL’s Megan Preiner talks investing in a crowded healthcare market

Megan Preiner is a managing director at Thomas H. Lee Partners, where she helps lead the Boston firm’s healthcare efforts alongside Josh Nelson, who is the head of the vertical. 

Preiner is currently a director of Adare Pharma Solutions, Agiliti Health, Autism Home Care Holdings, Healthcare Staffing Services, Hospice Care and Senior Home Care Holdings.

On the heels of a busy several months of dealmaking, PE Hub sat down virtually with Preiner to hear her views on today’s robust healthcare investing environment.  

What surprises you most about today’s healthcare private equity market?

What surprises me most is just the level of activity. I don’t know if we can point to the anticipated tax changes, or the post-covid environment, but there’s so much activity today that it’s hard to even try to spend time on everything that I would like to. 

We’re not trying to sell anything, so we’re fortunate. But if I had a company I was thinking about selling, I’m not sure I’d do it right now. I think that people are stretched so thin across the board because there’s so much activity in the market. 

We’re seeing these processes – where 18 months ago you would have had five or six people spending time – because it’s a good company, good growth, good sector. And today, if people don’t have a real angle or differentiated reason to spend time on it, they’re not able to. So we’ve seen a lot of processes, if not fail, sort of take a step back.

It’s either: people have got a really good process or they’ve got no one. 

So how do you pick your spots when there’s so much to choose from?

I’m trying to be very disciplined. I’ve got four areas of focus right now: pharma services, home-based care, medtech services and consumer healthcare. If something is not in one of those, as tempting as it is, and as interesting as I think the business model might be, I’m trying to just say no. It’s not squarely in my focus and I don’t have enough resources to do it.

Where I’ve been successful over the last few years has been in opportunities where I have a longstanding or outstanding relationship with the CEO and management team of the company, before an eventual process.

Having an ability to watch a company over a period of time before the actual auction – even if you don’t have visibility into the numbers, but you know what they’re saying at a high level and you see them execute on those growth plans – gives me the conviction to pound the table a little bit extra at the end of the day. 

If I haven’t spent as much time with management or I haven’t met management it’s hard to get up the curve, because there’s other people that have.

What’s your take on the price environment? Are today’s valuations justified in your view? 

No. It’s hard for anyone to argue that the prices are justified. To me, the justification of a price will be if multiples stay here and five years from now we’re able to sell at the same multiple. It’s hard to really justify the mid-to-high teens multiples that we’re seeing across a range of specialties. 

What we’ve tried to do is take the multiple, and take the emotional gut reaction to the multiple out of the conversation, because for us, you’re paying the market-clearing price. We can try to rationalize it by looking out to 2022, but at the end of the day, what you pay now is only going to work if you’re able to grow how we expect.

I do think that growth in certain sectors of the healthcare environment might just be at a different pace than we’ve seen. We, the broader market, might be able to underwrite higher growth rates because of this acceleration, and that growth profile could mean that those valuations are justified. 

Consider the adoption of home-based care and the willingness to try it. I think that people will see that there might actually be a real step change in some of these niche markets – in the willingness to accept technology and the ability of providers to provide the care, and payers accepting that.

What segments of healthcare are you most excited about today?

The two we’ve been most active in are pharma services, and clearly, home-based care, where we have three platforms today. 

There’s a lot of patients that would prefer for care to be done in the home and that’s true across a range of services; that’s especially true at end-of-life, but it’s also true for ABA therapy in a lot of cases. Patients feel safer, they can control more, they feel better, and it’s also less risky.

Providers often prefer it because it often keeps at-risk patients out of facilities; it controls the setting of care and it gives providers more direct insight into that patient. And the payors clearly like it because the home is usually the lowest cost setting of care. 

If you can find those three things – where it’s better for the patients, better for the providers, better for the payers – it’s a win for everyone involved.

Pre-covid, you saw payers refusing to pay for telehealth in a lot of places; that was a hurdle in shifting the care. We also saw some bias against home-based care from providers and patients. In the past year, all of those perceptions changed.

Think about mental health, where you’ve seen this growing acceptance of care provided virtually. This will increase the level of people who need care getting care because they’re now able to do it when they can schedule it. It’s also harder to no-show when it’s remote. 

Any other priority areas right now?

Within pharma services, we have been for a while trying to spend time around commercialization services and clinical support services.

The pandemic highlights the complexities of clinical trials, but I also think the tailwinds here have maybe been less pandemic related and more, in the last few years, driven by the growth in cell and gene and even biologic therapies. Clinical trials are different than they were before for traditional small molecule therapies.

There’s increasing complexities, both in the trial process, but then also translating to findings in the trials to ultimate commercialization. So as we look across that space, I think there’s a lot of interesting ways to play it.

As you continue to work mostly remotely, what are the pros and cons?

On the positive side, we did three deals in the last year, we recapped two companies, and we took Agiliti public. 

We have been incredibly productive, and I think working from home actually does facilitate that. For better or for worse, you’re able to schedule back-to-back meetings. You’re able to do diligence sessions that are very focused with just the right people on the phone and make those much more efficient. 

Taking the travel out of it just means that when you’re in the middle of a deal, you actually can use all that time and you’re not spending three hours in the airport.

But we absolutely lost out on some of the soft skills internally at THL. I firmly believe in an apprenticeship model. You learn from the people above you and being able to sit in a room with them. 

If I had a one-off call with a CEO in the office, I would ping the VP who was on that deal and say “hey come listen.” That’s how you learn – and you just can’t do that remotely.

Internally, we absolutely need to go back to some sort of hybrid at least. I think the same is true is on the portfolio company side. 

When we invest in a portfolio company, that is a partnership. What’s hardest is you miss the sense of the management teams as people. You miss the personal relationships that are really important for a partnership to be successful in the long run when things go badly.