What does the new exit environment mean for portfolio companies?
The economic slowdown of the past couple of years has led to a fundamental shift in the exit environment. In healthcare services, this shift may stick. Worryingly, we are told that private equity has cooled on services, turning its attention to life sciences, pharma services and digital. The sky-high multiples paid over the past few years have scared many away, seeing a longer investment horizon and working harder on value creation to justify expected valuations.
Whilst this may be true at the top end, there is still plenty of predicted activity at the middle and smaller end of the market, where organic or inorganic growth is still possible. Ufenau Capital Partners, a Swiss PE firm, recently closed a €563m continuation fund to continue its investment in dermatology businesses Corius Gruppe and vet services business Altano Gruppe.
For an asset like Finland’s Mehilainen – which was bought by Luxembourg-based CVC from US firm KKR and Luxembourg-based Triton in 2018 for a valuation of 19x EBITDA – a continuation fund is an unlikely strategy. HBI expects CVC to launch a sale process in Q2 2024.
With IPOs still unattractive (although we understand Italy’s San Donato may be planning one) exits to infrastructure funds or family offices appear to be the best option for large footprint facility based providers. Recent example deals include the sale of multinational dialysis group Diaverum to Abu Dhabi’s M42 Healthcare, pan-European imaging group Alliance Medical’s sale to infra fund Icon Infrastructure, pan-European diagnostics group Unilabs’ sale to Danish PE firm A.P. Moller, pan-European diagnostics group Affidea’s sale to Belgian PE firm GBL and multinational hospital group Mediclinic’s purchase by MSC, a shipping company.
Where these types of investors traditionally operated as limited partners, many have decided to go it alone have a go at direct investing, avoiding PE management fees. Although many are new, some family offices such as Jacobs and GBL have become specialists in healthcare.
Whilst much of the conversation around this centres on the impact to investors, it is worth pondering what this means for the portfolio leadership teams.
In healthcare, having an investor that knows the sector is crucial and CxOs could find the strategy is being influenced by people lacking the right experience. Healthcare service organisations are people businesses that require a really good knowledge of managing people. We hear that investors who made first-time forays into healthcare five or six years ago are now struggling with value creation activities on the back of paying lofty prices for assets.
The longer-term hold adopted by such investors could be beneficial in a sector that takes time to pivot and innovate, providing greater stability. But it could present a cultural challenge, especially if coming from PE ownership who will likely have pursued more aggressive growth.
There is also a risk that new owners will bring new leadership, particularly where investors want to play a very active role in the day-to-day, or for CFOs where an investor wants to implant someone used to operating how they do.
New regulation and governance structures as you shift ownership could be an added headache for leadership, especially if they’re used to being passed from one PE to another.
On the plus side there is often a willingness to deploy capital earlier to fund growth, particularly with infra funds, which may be a welcome change for some.
In this uncertain environment is it better the devil you know, or is the grass greener on the other side?
Analysis and discussion around the M&A landscape, value creation strategies, culture and leadership through change are at the core of HBI 2024 June 10-12 in London. Hear from Investors and provider CEOs how they tackle strategic challenges and pursue growth through case studies and data-driven presentation. You can find out more and book your tickets here.
We would welcome your thoughts on this story. Email your views to Lee Murray or call 0207 183 3779.
