PE investment can be key to gaining the capital and expertise you need to grow, but it also comes with strings attached. Here are four key questions this healthcare CEO learned to ask about working with PE.
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It’s the phone call that makes health care executives both celebrate and tremble: Private equity is interested in your business. Now what should you do?
Private equity pumped more than $1 trillion into business mergers and acquisitions last year, including $200 billion in my own healthcare sector. About one of every 10 private equity dollars overall is headed into health care, a new survey found, with most industry executives expecting an even greater emphasis on the sector in coming months. Nearly 450 private equity-healthcare deals have been announced so far this year.
As the CEO of a $100 million complete senior health company financed in part by private equity, I have years of personal experience with the highs and lows of working with the PE industry.
Private equity can be key to gaining the capital and expertise – and supporting the innovation – that you need to rapidly grow your business. For an entrepreneur who has logged big personal sacrifices to build a company, that phone call of interest from private equity can be a clear sign that you’ve made some wise business choices along the way.
But I also know that private equity investment comes with strings attached that may not be right for your situation. Here are four key questions I’ve learned to ask about working with private equity in the health care business.
• Do you trust them? It is critical to work with people committed to working together on the same team. You may know the inner operations of your own company, but private equity people have reviewed and likely run many other companies that are bigger and more successful than yours. They are experienced at many issues you have yet to encounter.
Private equity people are probably better at contracts, operating agreements, and legal issues than you are – they’ve seen this before and they know the loopholes and clauses and contingencies. Chances are, they also are better negotiators. A private equity partnership with hidden agendas or unfair advantages is destined to failure.
What’s important is to do a deal that becomes a true partnership, so that they succeed when you succeed – and vice versa.
• Who gets control? Most entrepreneurs start businesses to build something – you are responsible for the successes and mistakes. However, in exchange for their money, private equity managers will want some say over decision-making at your company. They’ll get seats on the board of directors, and they may require their people to be hired for key internal positions such as CFO. How much personal authority are you willing to give up for their private equity capital? If you cede majority control of the company, then you become an employee, not an entrepreneur. Business graveyards are full of entrepreneurs who were forced out of their companies after taking the money but giving up most board seats. Maybe you’re at the stage in your career and life where you’re willing to trade money for decision-making authority. Just make sure you weigh the tradeoff while fully anticipating the possible consequences.
• Are you on the same timeline? Private equity is focused like a laser on maximizing its investment within a certain timeframe, typically three to five years. Does your financial horizon match theirs? Producing the results they want under the tight deadline they demand can add a pressure cooker you don’t want or need. There also can be a temptation to focus on short-term gains at the expense of long-term goals. Only you can know whether the relentlessly ticking clock under a private equity deal will help or hurt your business plan.
• How do you handle advice? The business world is full of entrepreneurs who are drunk on their own ideas. How will your ego deal with outsider recommendations – especially when it comes from private equity people with more accomplishments, schooling, and wisdom? The reality is that entrepreneurs are usually focused on their own business and only their own business. Private equity brings a dispassionate and comparative view of how your ideas have worked (or not worked) in other markets. In my experience, private equity is really good at telling you what you shouldn’t do – they’ve seen too much in too many similar situations for you to ignore. At the same time, your business likely got to the point it is today by following your personal drive. Will you let someone else alter your vision?
With annual U.S. health care spending now accounting for 18.3 percent of our GDP – or $12,914 per person – it was inevitable for money managers to earmark more of their portfolios to medicine. There’s no doubt that health care can use outside expertise to innovate and grow. Private equity has the money and financial talent, but ultimately, it’s the people working in health care who have the honor and duty to do what’s best for patients and customers. There’s plenty we can learn from one another.
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