Investing in a Segmented Healthcare Market

As the healthcare sector strays from the traditional hospital setting, private equity has an edge in finding deals amid high valuations, says RSM’s Tammy Hill

Healthcare is a highly segmented sector, and to private equity, that translates into an opportunity—if you’re willing to do some homework.

The way private equity firms deal with companies after the acquisition lends itself to this segmentation in healthcare, says Tammy Hill, a partner in transaction advisory services at RSM. “They will partner with operating partners who are very knowledgeable in whatever space they’re thinking about investing in. Private equity investors, in general, like situations where the more you know, the better your chances of success are.”

There are some healthcare sectors that exist today that were much less prevalent five or 10 years ago, says Hill, partly because healthcare services have moved farther away from the big hospital setting. The boom in urgent care storefronts and clinics that is happening now was not nearly as common even five years ago. “In many cases, people’s first thought now, rather than going to a doctor or maybe even an emergency room, is to go to an urgent care center,” she says. In some cases, for certain illnesses or injuries, the urgent care clinics are less expensive, it’s easier to get in to see a doctor, and the reputation and quality of care has improved. “It’s just so much more efficient than some of the more traditional settings for healthcare services,” Hill adds.

The increased segmentation of healthcare companies has led to high demand from private equity investors and therefore high valuations. In some cases, this immediately leads to PE firms bowing out from the bidding process as the prices go up. But one way they can work around the high valuations is by harnessing the value of their operating partners and their expertise. “They will begin discussions with a company before the seller goes to market with a broader sales effort through an investment bank,” Hill says. “Maybe their operating partners have contacts. They see a good fit.” If they can make their case to the seller, if there’s a healthy transaction value, and if the valuation is right, going this route can result in a more streamlined process for the seller as well.

Hill says that doing the homework on a transaction up front is important, as well as making a solid bid and executing a quick close. “We do a large number of sell-side diligence projects now to help the sellers,” says Hill. “That gets a lot of the detailed homework out of the way on the financial and operational diligence. And then when the seller goes to the market, they can say, ‘We have already done a lot of the necessary work and, as a result, the buyer’s process should go smoothly and take less time.’”