Some apprehension about PE persists, however. One home care company CEO sums it up well: “I think some in PE are spread pretty thin, and as such don’t grasp the nuances of clinical care. In health care, sometimes a subtle issue can lead to underperformance, but PE folks [make] changes before it can be properly addressed.”
What may not be clear at the beginning of a PE deal is that a prime concern should be to figure out how to make the relationship work, by confronting and resolving any potential conflicts between investors and business owners on expectations. If handled well, it seems clear that partnerships between PE and health care companies can produce highly successful outcomes.
Executives and business owners and PE investors contemplating entering into a PE transaction will need not only to weigh the need for a ready source of capital, but also to consider the following:
What will unlock value for both parties?
Value creation brings the promise of transforming the company and creating long-term viability by making the business better. Pathways to value differ — through digital transformation, reconfiguration of assets or repositioning to enter new markets.
The litmus test is whether a potential investor partner will bring the right entrepreneurial and management talent to complement the owners’ domain expertise to reinvigorate the company to achieve its full potential. Alignment includes:
- Agreeing on validated business fundamentals that will release value
- Sustaining relationships and governance including an openness to collaborate on a journey of constant reinvention to remain relevant to the future
- Understanding that in health care, value creation will likely have a long-term investment horizon. Market segments and new technologies will grow at differing rates, so where should bets be placed that capture optimal alignment among market, product and timing?
Is risk a two-way street?
Both sides need to do due diligence, in commercial, operational, IT, human capital and cyber areas. In addition to the traditional financial, operational and tax diligence, environmental, social and governance diligence should be covered. Bringing partners along is vital, including:
- Aligning expectations and requirements for risk and reward
- Paying attention to the often-invisible cultural factors and organizational alignment that are vital for establishing a firm foundation for any business relationship
- Managing business continuity and risk and accurately assessing the complexity of scaling a business across multiple geographic areas or market segments
Does familiarity matter?
The complexity of investing in health care (e.g., the science, the regulatory factors or the intricacy of payment mechanisms) gives an edge to PE firms that specialize in the sector. Evidence from our research suggests that people who know the health industry best appear to navigate it more successfully. Mastering the health industry includes:
- Acquiring deep industry knowledge and a high degree of comfort operating in a highly regulated environment
- Understanding that health is a people business and, as achieving outcomes for the patient motivates practitioners within the industry, this should also be a key concern for investors
- Challenging and validating working assumptions about market trends, target company performance and new and expanded opportunities for both the company and its owners
Managing clinical processes can be complex, and health institutions can move slowly. Appreciating the constraints of the sector and a willingness to understand the complexities of each other’s businesses can lead to an enduring relationship with PE that positively affects the health of health care companies.