Private equity buyers have become a significant player in the healthcare M&A space and they continue to focus on those types of healthcare services that have the greatest opportunities for aggregating. Traditional health system buyers have continued to focus on which physician specialties will assist most with alignment and care coordination strategies. While there are many similarities in transactions with these two types of buyers, there are often just as many differences. The following examples illustrate how those interests may vary:
- Private equity buyers tend to focus on services with stable or increasing levels of reimbursement, opportunities to manage risk, and increase efficiency through streamlining physician performance.
- Health system buyers tend to focus on acquiring practices that would help create a larger market presence for the system. For example, health system expansion strategies are currently geared towards practices that would add new service lines or referral sources, which then add value and reduce costs overall.
- Private equity groups start by acquiring a platform practice in a particular specialty, and then increasing in size and scale over time through add-on acquisitions and organic growth across markets.
- Private equity groups are focused on a return on investment, with an exit within five to seven years, while health systems are driven by maintaining and improving market position for the long-term (15-20 years).
- Both types of buyers are driven to find compatible physician(s) and/or group(s) to create alignment with the other providers and services.
The increase in private equity acquisitions has also increased the use of representation and warranty insurance (“RWI”). Such insurance reduces the buyer’s risk in the event of a breach of any representations and warranties, instead of solely relying upon an escrowed portion of the purchase price. RWI also has the benefit of reducing the amount that might otherwise need to be placed in escrow. This has particular value to private equity buyers, who do not want to be limited when it comes time to divesture of a portfolio or assets.
From a seller’s point of view, RWI frees up more of the purchase price for payment at closing, and may allow for greater comfort in extending the duration (survival) and scope of representations and warranties. Including RWI in a deal can be a win for both parties by helping private equity funds make a full exit and providing buyers comfort and security.
RWI is a material term, and should be considered at the front end of a transaction. If the buyer or the seller is aware of potential claims at the outset, RWI should be introduced when negotiating the letter of intent. Alternatively, RWI can also be a tool used to help overcome certain hurdles as the deal progresses. If a transaction reaches an impasse, it might be a strategic time to consider whether RWI would help both parties feel more comfortable making certain business decisions.
Husch Blackwell continues to monitor and be active in private equity transactions so as to best represent our clients. We look forward to continue working with our clients to achieve their goals in such transactions.