Financing the Deal

Health Care Council Hosts Annual Panel Discussion

At the end of May, the Nashville Health Care Council hosted "Financing the Deal: Deal-Making Trends and Strategies for Health Care Companies." This signature annual event featured experts at the intersection of finance and healthcare for a lively discussion on current and future investment trends, as well as an inside perspective on the state of the market, impact of COVID-19 on deal flow and trending sectors to watch.

Moderated by Nashville-based Tom Wylly, a senior partner with Brentwood Capital Advisors, the panel included: Geoffrey G. Clark, senior managing director, Starr Investment Holdings; Bruce Crosby, co-founder and managing partner, Health Velocity Capital; Annie Lamont, co-founder and managing partner, Oak HC/FT; and Scott Poole, partner, Ridgemont Equity Partners. During introductions, panelists shared information on their specific areas of focus, ranging from early entrepreneurial stages to mature companies, and the amount of investment, which varied from $500,000 to as much as $1.5 billion.

Wylly began the discussion with a recap of healthcare deal activity from the last 18 months, He said 2019 was pretty quiet in Nashville after a busy 2018. Wylly added the number and the dollar volume of deals had decreased in 2019 and ... in the first quarter of 2020 ... healthcare mergers and acquisitions dropped another 10 percent with the dollar value of those deals down 77 percent.

"So, you can see the M&A market has been weakening over the last few years and was really put on life support in the first quarter in the wake of the virus," Wylly said. He then asked the panelists to characterize their deal flow prior to the coronavirus and describe the impact of the pandemic on their portfolio companies.

Poole said the impact to his firm's portfolio companies has varied widely depending on the business, with about half of the companies being largely unaffected, a third down 20-30 percent and the balance seeing a significant downtown. Struggling companies in their portfolio have furloughed staff, cut salaries and postponed planned transactions.

"Other businesses have had very different experiences," Poole continued. "For example, we have two healthcare distribution businesses, one that delivers defibrillators. Historically, defibrillator demand has grown 10 percent per year, but demand is down in this environment. For those customers, we're now selling personal protective equipment. We created a whole new product portfolio of masks, gloves, gowns, hand sanitizer, wipes and more, which has filled the hole from the defibrillator demand slow-down."

Crosby said digital health was a very robust market in the first quarter of 2020, with $3.1 billion invested in digital health companies, according to Rock Health. "Like most, once COVID-19 hit, we retreated and focused on our portfolio. Now we're slowly moving out of it," he said. "We're invested in MDLive, one of the largest telehealth platform companies. Like other telehealth companies, they've seen a tremendous growth in volume and benefited from the coronavirus. On the other side of the spectrum, we have companies that sell software to health systems, and we expect sales to be slow for three to sixth months until hospitals get back on their feet."

Lamont referred to the coronavirus as "an accelerant" for investment trends such as primary care, home care and digitizing healthcare services. "Right now, you don't want to be in an institution like a nursing home or hospital unless you have to be. You want to stay home and have all the support at home. Just like everyone has gotten used to using Zoom, the reality is whether it's mental or physical health, the coronavirus has changed the dynamic between the clinician and the patient." She added the pandemic "has created an inflection point in healthcare that's going to be really powerful."

Clark said his firm's healthcare portfolio companies took the hardest hit between mid-March and mid-April but are recovering quickly with volumes up 50 percent to 75 percent in the four weeks since then. "We are seeing an aggressive snapback. The question we wrestle with is when will this start to level out? What does pandemic recovery look like? At this point no one knows the answer," he said.

Like Lamont, Clark sees a silver lining to the pandemic. "COVID has been the single biggest accelerator of change I've seen in 25 years of investing," he said. "For businesses that have good balance sheets, this is an incredible opportunity and incredible time," he added of changing the delivery dynamic.

When the pandemic hit, the focus for all the panelists turned to supporting companies already in their portfolio. Wylly asked what key factors the investors would need to see in order to close new deals going forward.

"From a valuation perspective, sometimes it takes time," said Clark, who is looking for high-quality and high-growth assets and market leaders "Like the real estate market, it will take sellers time to come to terms with reasonable valuations."

Poole said there was a very different level of confidence when evaluating companies pre-pandemic. For deals to come back, he said rebuilding confidence in forward-looking projections and predictability are key.

Crosby concurred, saying, "It's going to take time for us to get a better handle on what revenue growth is going to be ... that just takes time." He added that while Zoom videoconferencing aids communication, it's hard to beat face-to-face meetings, particularly for new investments with new management teams.

While Lamont agreed, she said there are some exceptions. "We just committed to a company where we hadn't met them live," she said. "The major investor was a past CEO for one of our companies and the anchor customer was one of our LPs (limited partners)," she added of triangulating around those established relationships.

Going forward, Crosby said he was interested in the movement of care outside of hospital walls, including telehealth and behavioral health and substance use disorder spaces. Poole said he also was interested in behavioral health, including combination school-based and home-based therapies for autism and other developmental delays, alongside specialty home infusion services and post-acute care. Clark identified tech-enabled companies and organizations that address the "pain points" of healthcare such as physician staffing. Lamont reiterated her interest in primary care and companies embracing digitization to expand access to care.

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