For healthcare business owners, private equity is a viable option to finance business growth--acquisitions, restructurings, new market expansions, etc.--through the use of outside capital.
Yet many misconceptions about private equity persist. They stem from the industry's nascent years in the 1980s when firms would buy companies using a great deal of leverage, strip their assets, break them apart, add little (or no) value, and make oversized returns. Movies such as "Wall Street", "Other People's Money", and even "Pretty Woman" helped perpetuate this notion.
While some PE firms still might be interested in a quick flip, the majority now work alongside business operators to increase revenues, make acquisitions, and build a stronger business over the long-term. However, that doesn't mean the stereotypes have faded.
Here are some of the most common private equity myths in healthcare, and the facts to refute them.
Myth: Private equity firms don't understand healthcare
There certainly are many examples of failed investments where the business owner felt his private equity partner didn't understand or bring value to his company. The truth is, as the healthcare system grows more complex, it is essential to find a private equity partner that has deep experience in your sector. And not only in the sector, but in the specific area in which your company practices.
Many private equity firms have developed an expertise within certain sectors of healthcare, and now have relationships with major payers, medical centers, or other healthcare experts. As a business owner in the space, finding a partner that understands your specific niche can help you refine your growth strategy, navigate the changing regulatory landscape, and take your business to the next level.
Myth: Private equity firms won't accept reimbursement risk
In healthcare, there always will be a certain amount of reimbursement risk. PE firms active in the industry understand this and are willing to account for some--though, not a lot--of risk. A good private equity firm will develop an understanding of the reimbursement environment in which the target company operates, so it can plan and build a growth model that incorporates the risk of declining prices.
Myth: Laws and regulations prevent private equity firms from investing in most healthcare businesses
The legal and regulatory framework of healthcare makes investing in the sector more complicated. However, experienced healthcare investors understand how to structure investments that comply with applicable rules and have minimal impact on the business going forward. For example, a private equity firm cannot typically invest in a physician's practice, but it can own a practice management organization, which handles all the non-clinical work including scheduling, billing, payer contracting and information management. Your private equity partner should understand these issues, so that both the transaction and your ongoing business run smoothly.
Myth: Private equity funds are only looking for a quick flip
Not all private equity firms are short-term investors. The majority care about building value over the long-haul. In fact, most funds model their returns anywhere from three to seven years, and many are even comfortable holding a business from five to 10 years, provided they can create value for shareholders throughout the period. This long-term horizon gives management teams ample time to work through any short-term bumps in the road, or changes in the environment brought about by regulatory or reimbursement changes.
Remember, most private equity firms are looking for a seat on your board, not in your office. They're looking to offer strategic guidance and partner with you to help grow and build value in your organization.
After all, this is your business. You're the one who's gotten it to where it is today. Most private equity firms will want to capitalize on that experience and expertise to propel the business’s growth through the future.
Michael Rainey is senior associate at LLR Partners, a leading private equity firm that has invested over $280 million in healthcare services companies over the last 10 years.