Is it common for the investment team work on operations in smaller shops?
I am new to the PE space, and have what could be a very obvious question but hoping to receive some clarification from the folks who have been there done that.
I have an opportunity with a new smaller firm (4 yrs old) that lets say acquires dentist practices and rolls them up into their larger portfolio - creating synergies to increase bottom line etc. They have deployed around 350M in capital since their inception.
The role mainly focuses on the investment side, valuation, due diligence, negotiations of the acquisitions but is also involved in training and integrating the port cos into the firms management systems and assist with operational needs when the pipeline is slow. I am wondering if this is common practice for an analyst or if I would be sinking my career progression.
I appreciate any guidance.
Yeah this is extremely common. Would say 90%+ of LMM shops don't have a dedicated ops team.
Not sure why you would think this would sink your career progression, if anything I think it makes you more well-rounded giving you a better understanding of how businesses actually operate.
Thank you
Not sure if "common" is the right word, but it is not unheard of and by no means a detriment to your career. I say "common" might not be the right word simply because small investment teams/smaller shops just have a lot to deal with in general (sourcing, deal execution, portco reporting, fundraising, investor relations/reporting, etc), plus a roll-up implies a high volume of deal/add-on activity; and the firm might not even have the/enough internal expertise to really spend all that much time in the portcos. But this certainly can and does happen, more so than if you were at a MM/UMM/MF shop.
I would say having any level of operating experience (unless it is at the complete detriment of deal experience, which doesn't sound like it here) will be highly beneficial for your career, both in PE and/or other business related roles. PE as an industry is maturing/mature, and having deal experience alone is starting to become commoditized as an investor - really upfront deal execution (e.g., sourcing, deal structuring, quarterback diligence, negotiate legal docs, etc) is a fairly standard process and really not that difficult after you've done it a few times. The days of generating consistent top quartile/decile returns simply relying on financial engineering (e.g., leverage, creative financing structures, buy low/sell high) is pretty much gone because of PE industry maturing, even in the LMM/MM space. And businesses in the LMM/MM space are both especially in need and have the greatest opportunities for operational improvements/growth, which is really what drives returns now.
You're already seeing more and more PE firms investing in internal ops teams to become more operational involved with portcos (typically more experienced CEOs/CFOs/etc though), so investors that have seen both sides of investing and ops have a real advantage. I've been on both sides myself, and can say first hand that the roles/responsibilities of each role are highly complementary to each other for an individual person's professional development and competence; which aligns quite well with where the PE industry/firms are going.
````````````````````````````
Specifically on a dental/healthcare roll-up though, you might want to diligence whether their strategy will continue to do well in the future, rather than relying on how much capital has been deployed. In general, healthcare services roll-ups have not really done well, despite a bunch of capital in the last ~5-10 years going into this strategy. It's quite difficult for a highly hands-on, money oriented PE firm to not somehow affect daily operations and patient outcomes as a result. I'm not saying PE can't do wonderful things for healthcare services businesses, but the objectives of PE's fiduciary duty to maximize LP returns vs. patient outcomes can be conflicting and difficult to navigate if the PE firm is not very careful with this fine line; which is then exacerbated by the fact roll-ups in general are also just operationally complicated and have more execution risk.
Just imagine a very common scenario where a dental roll-up will want all the practices on the same medical records software, which means practices are going to have to change whatever they're currently using. Transitioning software very likely could inadvertently lead to incorrect patient medical records being imported/exported from one system to another. And this is happening at a large and fast paced scale. The intentions of the strategic initiative is in the right place, but the execution is fraught with risk. Not saying this specific reason has ruined deals. Just that this is an example of PE being in HC services is a complex topic.
There's more broadly real questions about whether PE should be/will be involved in investing in HC businesses. I'm not saying I know one way or the other myself; but it would not be surprising if at some point in the future there is much greater regulatory scrutiny around PE investing in certain HC businesses (e.g., services businesses like medical practice roll-ups).
All that said, if you're joining as an analyst, it's probably great learning experience either way. And the future of the firm isn't as important because what you'll learn will be highly beneficial, even if you don't stay at the firm beyond a couple years.
Thank you for this. This is very insightful, answers my question and then some. Cant thank you enough.
Great read and a bit scary to read as someone interested in going into HC PE Ops and focus on operation process improvements and integration of new acquisitions. What sectors within healthcare do you think have the highest chance to withstand regulatory concerns?
Hopefully didn't come across as if HC PE is at risk of something catastrophic. Doesn't seem like the case at the present moment, but it is something that is actually in the current conversations (too early tell anything meaningful). More a reflection of how an investor might/should have to think about what could go wrong with portcos (having had some real exposure to this while I was in investing but by no means a specialist). And also how an operator might have to think about it down to the actual operations being the one responsible for having to implement the integration (or whatever strategic initiative). Being able to see both vantage points as the investor and the operator really can be quite complementary/beneficial to each other when it comes to this field of work of investing/building businesses we're all in (and what that might imply for one's specific career in it).
To answer your question related to your career? Not sure I'm qualified to opine at the level of specific sectors. I'm not in PE nor HC anymore. I will say what happens at the PE investment levels don't have to translate to what will be bad for your career choice though. It can take a underperforming PE fund like 10-15 years to actually unwind. And when portcos are struggling, that is when the PE Ops team arguably is more necessary/helpful than when things are going well. I'm sure any time spent in HC PE Ops can be incredibly interesting and you'll learn a ton if you're genuinely interested in the job.
`````````````````````````````````````````````````````````````````````````````
Btw "much more regulatory scrutiny" (relatively to basically zero right now) could mean very many different things in terms of policies and enforcement, and then the actual impact and risk (it is the government after all...). It could end up being something pretty innocuous like every PE HC investment that sees patients just needs to have some kind of clinical advisory board that guides the company on any decisions or makes decisions related to patient care - that probably wouldn't change how PE invests in HC businesses too much (some PE backed companies already do this; it definitely is in their best self-interest to do this). All the way to, in theory, something extremely catastrophic like PE can't be investing in HC at all - this doesn't actually seem likely/"impossible" to happen. There's quite a spectrum of what "risk" could actually constitute in this context (and when it comes to investing in general outside of this specific case).
My nonexpert take just for sake of conversation? Seems like any HC (services) companies that are in direct contact with patients and responsible for any of their clinical care is high on the risk of being much more scrutinized/regulated (e.g., hospitals, medical practices). In general, most businesses that get PE investment for the first time (which often are the ones being acquired in roll-ups too), especially businesses that are very people intensive (healthcare providers at that), do face a hard time adjusting to the pressures of PE oversight (in part because of fiduciary duty of the firm). It's not exactly like being an investor as a career is known to be a "chill" job. It's no surprise that this can and does trickle down to the operations of the companies too, even including the clinical staff. There are real examples and news articles of certain PE firm's involvement hurting HC services companies you can Google. Should there be regulatory oversight for the patient's well being? Hard to argue against it...(but anything that involves politics/law making is by no means efficient.)
If anything, it's probably the PE firms themselves that will self-select out of certain sectors just because it's too much risk. You do see a trend of PE firms following/emulating other PE firm's investment ideas too (hence why PE skill set while great, can also become commoditized to an extent). And I think in general PE firms are now much less excited about medical practice roll-ups strategy. Seems like HC companies a layer or more removed from actually seeing patients are much safer though be it from regulatory oversight or PE investment strategy (e.g., consumer healthcare/wellness devices that doesn't require FDA approval, and a probably whole bunch more examples). Depending on the HC PE firm's mandate, even other business models that service the healthcare industry could still be considered "HC PE" (e.g., HC SaaS companies like a medical records software company itself).
If this ends up still being a really burning question, your best bet is probably to talk to healthcare lawyers that come "big law" firms with a dedicated HC practice (McDermott Will & Emery being one that especially comes to mind) or there's likely some lessor known but high reputable/specialized healthcare exclusive law firms. A lot of these type of discussions about regulatory topics often come from conversations you'd have with these experts as part of industry diligence/awareness or interacting with your portcos, and the law firms tend to be very close to all of this.
Thanks for your insights! Do you think that nowadays PE Ops is actually a better job than deal team? Much appreciated!
It's completely normal at LMM firms.
Ut nemo occaecati provident quibusdam optio alias. Maxime consequatur fugiat autem nihil recusandae qui illo. Tempora a ut dicta quis deserunt sed.
Voluptatem et consequuntur laudantium ab. Nihil quod corrupti animi non velit voluptatibus. Quo dolorum rem blanditiis fuga. Deserunt corporis nobis ea quo consequatur voluptates vero.
Sed veritatis consequatur excepturi neque nobis enim minus. In qui qui deserunt. Aut totam ipsum dolorum voluptatum cupiditate voluptatem. Neque aspernatur praesentium consequatur magnam.
Similique quo adipisci voluptas nihil expedita. Ex modi incidunt quia occaecati. Quasi quam modi adipisci aliquid eaque dolores. Impedit tenetur et aperiam. Consequatur veritatis magni in ut autem temporibus. Doloribus sunt voluptas est minima ut.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...