Exploring the US Healthcare Private Equity Market with InTandem Capital Partners

Posted by bedrock on 28th June 2024

Over the last few decades, healthcare has grown to make up 20% of the U.S. economy. This growth has catalysed the need for improved patient outcomes and cost efficiency, and presents significant opportunities for both consolidation and innovation, making it an attractive target for private equity firms seeking long-term growth.

To explore the opportunity further, Neil Benjelloun, Bedrock’s Head of Private Markets, hosted a Q&A session with Elliot Cooperstone, Founder and Managing Partner of InTandem Capital Partners.

InTandem Capital Partners (“InTandem”), is a middle-market private equity firm focused on investing in healthcare services businesses that align closely with the Healthcare Quintuple Aim – the simultaneous pursuit of enhanced patient experience, elevated provider experience, improved clinical outcomes, greater healthcare equity, and lower cost of care delivery. Over its 20-year history, InTandem has developed and implemented an operationally intensive, hands-on value creation model to help accelerate transformational growth of North American payor, provider and pharmaceutical services companies that are concurrently improving the healthcare system via Quintuple Aim alignment. 

Setting the Stage for Resurgence of US Healthcare Deals

Following a slowdown in transaction volumes in 2023, the U.S. healthcare market is now showing signs of stabilisation. This cautious optimism is rooted in strong market fundamentals: U.S. healthcare spending is growing and patient needs are rising, driven by an ageing population [1]. These factors, combined with a gradual alignment in buyer and seller valuation expectations, set the stage for an active M&A healthcare market in 2024 and beyond.

From Operator to Private Equity Founder

Q: [Neil] Can you introduce yourself and provide some background on InTandem?

A: [Elliot] I’m Elliot Cooperstone. I started the firm 20 years ago, and my introduction and the firm’s introduction are rather intertwined. I did not take a traditional path to establishing a private equity firm. My background was as an operator in acquisitive healthcare services companies and that is where I learned the deal business. Early on in my career, I gravitated from financial services towards healthcare services because I was amazed by the vast range of opportunities within healthcare. My last experience as an operator was working in a PE-sponsored business, where I was underwhelmed by the level of support and guidance I received from our PE partners. This disappointment drove me to create a firm in 2004 that could truly be helpful to management by having a team of experienced healthcare operators and investment professionals working together. We focus exclusively on middle-market healthcare services. Specifically payor, provider and pharmaceutical services, targeting businesses with EBITDA between $5 million and $30 million. Our value proposition is to provide not only capital but also a comprehensive curriculum and hands-on support to help businesses grow and operate successfully at a larger scale.

“Our value proposition is to provide not only capital but also a comprehensive curriculum and hands-on support to help businesses grow and operate successfully at a larger scale.”

New Opportunities from Value-Based Care

Q: [Neil] In the interest of setting the scene for us non-U.S. folks, could you elaborate on the transition from fee-for-service to a value-based care model in the U.S. and its implications on the private equity landscape?

A: [Elliot] Certainly. The U.S. healthcare market is massive, accounting for roughly 20% of GDP. We focus on healthcare services, particularly payor services, provider services and pharmaceutical services. The shift from fee-for-service to value-based care is most relevant to provider services, where traditionally, provider groups were paid based on volume. This model does not align the interests of clinicians, patients, and payors. Value-based care, in contrast, pays for outcomes, like keeping an individual healthy. This shift is most evident in primary care, where providers take full risk for patients and are incentivised to keep them healthy to avoid high costs like emergency room visits. This model is a catalyst for scale and consolidation, requiring capital and expertise, which is where private equity plays an important role.

“[The value-based care] model is a catalyst for scale and consolidation, requiring capital and expertise, which is where private equity plays a role.”

Beyond primary care, there are opportunities for specialists to be compensated in ways that reward outcomes rather than volume. For example, in orthopaedics, we negotiate bundled payments for comprehensive care, aligning incentives for quality and cost efficiency.

Advantages of Seeking a Focused Approach

Q: [Neil] What are the advantages of focusing on specialised healthcare payor, provider and pharmaceutical services compared to a broader investment strategy?

A: [Elliot] For two decades, we’ve specialised in select high growth and resilient sub-sectors of healthcare services, leveraging our deep knowledge to confidently make investment decisions. We believe our focused approach, honed over years, offers an advantage in understanding reimbursement trends and underwriting deals effectively. Despite our precision, the markets we operate in are vast; for instance, orthopaedics alone is a $420 billion market nationally. Thus, while our focus may appear narrow on the surface there are in fact ample investment opportunities within our chosen sectors given the sheer size of the end markets. Our expertise extends beyond underwriting to encompass shared business models across our sectors. We’ve distilled this knowledge into a comprehensive 21-chapter playbook, which guides every facet of operations and growth. Rather than engaging in banker auctions, we employ a sector-focused thesis-driven sourcing approach to identify local leaders poised for breakout expansion in partnership with InTandem. We proactively generate theses and receive inbound inquiries given our specialised reputation, targeting businesses with between $5 million and $30 million of EBITDA and needing support for growth, infrastructure, and technology. Unlike generalist firms, we are able to offer tailored support to niche companies.

“In contrast to generalist firms, we are able to offer tailored support to niche companies.”

Targeting Pioneers Set to Transform the Sector

Q: [Neil] What specific areas within the U.S. healthcare services sector are you particularly enthusiastic about, and are there any segments your firm actively avoids?

A: [Elliot] We focus on sectors and businesses aligned with the Healthcare Quintuple Aim –enhanced patient experience, elevated provider experience, improved clinical outcomes, greater healthcare equity, and lower cost of care delivery. Companies meeting these criteria are our primary investment targets, as opposed to those merely providing services that don’t also generate systemic improvement. Our approach begins by analysing various healthcare categories and identifying trends such as shifting site of care delivery from costly institutional settings like hospitals to home-based environments. We seek markets positively influenced by these trends, particularly those moving towards value-based care, like orthopaedics. In evaluating investments, we identify industry leaders within a given sub-sector that are demonstrating exceptional capabilities be it operational or procedural, and that distinguish them from the average. Conversely, sectors like general dentistry, where performance differences among practices are minimal, do not fit our strategy. In summary, our investment philosophy targets companies poised to lead industry transformation and deliver tangible benefits to patients, providers, and the healthcare system. Sectors not aligning with the Healthcare Quintuple Aim or lacking market leadership potential are avoided.

“Our investment philosophy targets companies poised to lead industry transformation and deliver tangible benefits to patients, providers, and the healthcare system.”

An Investment Approach that Drives Impact

Q: [Neil] You mentioned the aim of lowering costs, improving experience, and enhancing outcomes. Some managers claim to achieve these goals as impact managers. How do you perceive this, and do you see yourselves as impact managers?

A: [Elliot] We recently held our annual general meeting where our portfolio company CEOs discussed the transformation of their businesses into market leaders by reshaping and enhancing care delivery. These stories are deeply moving. While some might view us as a great social impact fund based on these outcomes, we haven’t actively pursued that label. It seems to be a natural result of our endeavours rather than a deliberate agenda.

“While some might view us as a great social impact fund based on these outcomes, we haven’t actively pursued that label. It seems to be a natural result of our endeavours rather than a deliberate agenda.”

So, I don’t have a definitive answer to your question but you are correct; while we haven’t explicitly emphasised the term “impact” our portfolio companies are inherently enhancing the healthcare system and improving the lives of people in vulnerable states.  We are also aware that others, including large fund complexes, have invested in our funds through their impact sleeves.

Sponsor vs Strategic Exit Routes

Q: [Neil] Can you elaborate on exit routes to larger sponsors versus strategics? Are strategics more favourable acquirers, given the synergies they expect post-close allows them to pay a higher PPM? How do you navigate this dynamic?

A: [Elliot] In short, we include both sponsors and strategics in our exit strategies and assess the best offer. The sponsor versus strategic dynamic can vary cyclically. While strategics may be conservative in favourable credit markets, sponsors might offer higher bids. Another consideration is that sponsors often grasp market dynamics swiftly, whereas strategics may require more time due to their larger organisational structures. Ultimately we welcome bids from both sides, prioritising the best deal terms to maximise value.

The Role of AI in Healthcare

Q: [Neil] How do you see the role of artificial intelligence (AI) in the healthcare sector, and how might it influence your investments?

A: [Elliot] We’re actively embracing AI advancements. At our recent annual general meeting, Professor Hod Lipson from Columbia University, a professor of Mechanical Engineering and Data Science and an AI expert, discussed its broader implications, particularly in healthcare. While some sectors may undergo revolutionary changes, our services may see a different impact. Several of our portfolio companies are already using AI. For instance, Ivy Fertility employs AI tools for real-time translation, streamlining of global communications, as well as donor matching using facial recognition technology. We’ve embedded tech leaders in each business, who are overseen by InTandem’s technology-focused Operating Partner, to optimise AI implementation. As another example, HouseWorks, a personal care provider business, utilises technology to attract and retain caregivers through a proprietary app for scheduling, payments and margin management. We believe AI enhances efficiency, customer experience, and portfolio growth. By embracing innovation, we believe we are able to remain agile and responsive to industry dynamics, ensuring sustained value creation for stakeholders.

“We believe AI enhances efficiency, customer experience, and portfolio growth. By embracing innovation, we believe we are able to remain agile and responsive to industry dynamics.”

Conclusion

With recent data showing that healthcare spending in the U.S. is outpacing GDP ^[2], there is a clear opportunity for the private equity industry to continue supporting the ongoing transformation of the market.

Elliot’s insights highlight three crucial considerations for private equity investments in the U.S. healthcare landscape.

1. The Transition to Value-Based Care – The ongoing shift from fee-for-service to value-based care is and will continue to revolutionise the sector. This shift creates substantial opportunities for private equity investors to support and benefit from models that emphasise patient outcomes and cost efficiency.
2. Sector Specialisation – Specialising in specific healthcare sectors and subsectors enables firms to leverage deep industry knowledge, understand unique market dynamics, and create tailored strategies. This focused approach can drive superior outcomes and sustainable growth, offering a competitive advantage over more generalised investment strategies.
3. Leveraging AI and Technology – Embracing AI and technological advancements is a key to driving efficiency and growth in healthcare. These tools can enhance service delivery, improve patient experiences, streamline operations, and reduce costs, thereby boosting overall business performance.

If you have any questions about the themes discussed in this article, please do not hesitate to get in contact with us at info@bedrockgroup.ch

Sources

[1] The 2024 Outlook for Private Equity in US Health Care – Boston Consulting Group, January 2024

[2] CMS Releases 2023-2032 National Health Expenditure Projections – Centers for Medicare & Medicaid Services

Important Legal Information

This document has been approved and issued by Bedrock SA licensed under Swiss Law, authorised by the Swiss Financial Market Supervisory Authority (FINMA) and supervised by the AOOS; Bedrock Monaco SAM authorised and regulated by the Commission for the Control of Financial Activities (“CCAF”); and Bedrock Asset Management (UK) Ltd. authorised and regulated by the Financial Conduct Authority in the UK (jointly, hereafter, “Bedrock”). 

The information and opinions contained in this document are provided for background information and discussion purposes only and do not purport to be full or complete. No information in this document should be construed as providing financial, investment or other professional advice. This information contained herein is for the sole use of its intended recipient and may not be copied or otherwise distributed or published without Bedrock’s express consent. No reliance may be placed for any purpose on the information contained in this document or their accuracy or completeness. Information included in this document is intended for those investors who meet the Financial Conduct Authority definition of Professional Client or Eligible Counterparty or for those investors who meet the Swiss Federal Act on Financial Services Act (FinSA) of a Professional Client. 

Investment risks

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Alternative investments risks in general

As a professional client, you should be aware that investing in alternative investments can carry significant risks. Alternative investments are investments that do not fall under the traditional categories of stocks, bonds, and cash.

Examples of alternative investments include hedge funds, private equity, venture capital, and real estate.

Under the FCA financial promotions framework, alternative investments can only be promoted to professional clients, such as yourself. This is because professional clients are deemed to have the necessary knowledge and experience to understand the risks involved in these investments.

However, even with this level of expertise, it is important to be aware of the risks involved in alternative investments. Some of the risks include:

•Illiquidity: Alternative investments can be difficult to sell quickly, which means that you may not be able to access your money when you need it.

•Lack of transparency: Alternative investments are often less transparent than traditional investments, which means that it can be difficult to get a clear picture of the underlying assets and their performance.

•Complexity: Alternative investments can be complex, with unique features and structures that may be difficult to understand.

•Concentration risk: Alternative investments often require a large minimum investment, which means that you may end up with a concentrated portfolio and a high degree of exposure to a single investment.

•Higher fees: Alternative investments often come with higher fees than traditional investments, which can eat into your returns.

It is important to carefully consider these risks before investing in alternative investments. You should also ensure that you understand the terms of the investment, including any fees and charges, before committing your money.

If you have any questions or concerns about investing in alternative investments, you should seek the advice of a professional financial advisor who is qualified to advise on these types of investments.

Risks related to Private Equity (PE)

•Capital at risk: investment in PE carries a risk to the capital invested and that you may lose some or all of their capital invested.

•Illiquidity: investment in PE can be difficult to sell quickly, which means that you may not be able to access your money when you need it.

•Limited liquidity events: the investment in a PE may only provide limited liquidity events, such as partial or full company sales or mergers, and such events may not occur for several years.

•Unlisted security: the investment in a PE is an unlisted security and there is no established market for trading the shares.

Investment suitability: the investment in a PE may not be suitable for all you, and potential you should seek professional advice before investing.

•Concentration of investment: the investment in a PE will typically involve a concentration of assets and you should consider the risks associated with this.

•Complex structure: the investment in a PE may have a complex legal and tax structure, and you should seek professional advice to understand the risks associated with this.

•Fees and expenses: all fees and expenses associated with the investment in a PE, including management fees, performance fees, and other charges, and explain how these fees will be calculated and deducted.

•Regulatory risk: the investment in a PE may be subject to regulatory risk, and that changes in regulations could negatively impact the investment.

If you are considering investing in private you should carefully evaluate these risks, conduct thorough due diligence, and be prepared for longer investment horizons and potential illiquidity. Consulting with a qualified financial advisor or private market expert is essential to make informed investment decisions.