By Eduardo Tavel
No matter where you are in your home-based care journey of ownership or operations, it’s never too early to think: “What’s next?”
We get asked frequently, “Who are the buyers for home-based care companies?”
In this article, we’ll categorize the investors or buyers who might be involved in your business’s next chapter. Depending on your ultimate exit strategy, you may run into some of them.
Buyer Types
Broadly, there are two types of home-based care buyers - strategic and financial. This article intends to:
Explain the difference between the two buyer types
Further break down each buyer type by category
Because these buyers have fundamentally different goals, how they approach your business in an M&A transaction can differ significantly.
Let’s begin with the notion that strategic buyers tend to dominate the M&A landscape in terms of deal volume:
Strategic Buyers
These buyers usually operate in the same or connected industry (see ‘payviders’ below) as the seller. They can realize synergies through acquisitions. Synergies represent a financial benefit to them, so they can afford a higher price than a buyer who can not capture them. These synergies can come in the form of duplicate cost savings, referral relationships, and, more recently, ‘value-based’ synergies.
In the home-based care industry, we categorize strategic buyers as:
Public companies
Private Equity (PE) portfolio companies
Non-PE-backed
Public Companies
These companies are consistently under Wall Street’s microscope and public scrutiny. They have different reporting requirements, and the price at the Price/EBITDA multiple at which their shares are trading could influence their acquisition decisions. Examples of publicly-traded home-based care companies include Amedisys, Addus, Enhabit, Aveanna, and The Pennant Group. This group has expanded recently to include “payviders” who are playing a significant role in the value-based care movement, including Cigna (Signify), United’s Optum Ventures (LHCG), and Humana’s Centerwell and Gentiva (which it co-owns with private equity group Clayton Dubilier Rice).
Private Equity Portfolio Companies
These companies are formed through platform investments – a private equity fund’s first acquisition and entry into an industry. Their growth strategies usually involve ‘add-on’ or ‘tuck-in’ acquisitions around their platform investment. Their cost of debt, which is a product of the interest rate environment and their leverage, can influence their acquisition appetite.
Examples of private-equity-backed home-based care portfolio companies include:
Non-PE-backed
Every strategic buyer who is not public or PE-backed falls into this category. Their size and level of sophistication will influence their appetite for acquisitions. This includes both for- and not-for-profit health systems (for example, Trinity Health) or other larger industry not-for-profits – most prominently in the hospice industry.
Financial Buyers
On the other hand, a financial buyer is interested in investing in a company with a targeted internal rate of return (IRR) and exit date (subject to change, depending on market conditions) at the closing of its initial ‘platform’ acquisition. Since financial buyers are not operators, and to minimize risk, they will usually incentivize the company’s current operator(s) or an industry operating partner with equity in the platform.
Private Equity Groups
Private equity groups invest in private companies or buy out public companies and take them private. They raise money from limited partners, such as pension funds or wealthy individuals, and create a fund that typically lasts 7-10 years. From that fund, they buy stakes in businesses they hope to improve and sell at a profit, which they share with their limited partner investors.
Most private equity groups employ a ‘roll-up’ strategy in the home-based care industry. Once the platform is acquired, that company will acquire multiple smaller home-based companies, usually in different markets. The goal is to create a larger, more efficient entity that can benefit from economies of scale, operational synergies, and increased market share. The key concept to this strategy is called 'multiple expansion', where the combined company will sell for a substantially higher multiple of its earnings than the individual companies they acquired. They will usually use debt financing for acquisitions to maximize returns.
Examples of active private equity sponsors in home-based care include:
Family Offices
Investment offices that manage capital for one or a small number of high net-worth families. Due to this, they have more flexibility regarding their holding periods and investment strategies. Like private equity groups, they must find a platform investment to break into the industry.
Examples of active home-based care family offices include Dorilton Capital, via their investment in Traditions Health, and Kaltroco, who owns New Day Healthcare.
Independent Sponsors
Also referred to as fundless sponsors, independent sponsors are individuals or a group of individuals who identify and acquire companies, typically with the help of investors. They are often former investment bankers or private equity professionals who have the skills and experience to identify and execute on acquisition opportunities. They often target specific industries based on their expertise and historical success.
Unlike private equity, Independent sponsors typically do not raise funds until they’ve identified a target. They work through various equity channels, such as private equity, family offices, hedge funds, and pension funds.
Search Funds
In the most common form of this investment model, an MBA graduate from a top business school obtains financial backing from the school’s prominent business network, hoping to acquire a profitable business that they can operate and scale. The backers could be successful school alumni, professors, debt partners that have established relationships with the schools, and more. Although this model started in 1984, it has recently gained popularity.