When introducing the idea of private equity entering a business, it’s important to make the potential value-add clear from the initial conversation. Doctors are often skeptical about private equity ownership, but providing references and having a clear focus on growing revenue over cutting costs can help facilitate these early conversations.

On this episode of The Capital Corner, McGuireWoods' Geoff Cockrell invites Alessio Baraldi, Managing Director at Albaron Partners, to discuss value creation in healthcare provider services. This topic is timely as the market has shifted from an environment where all investors were finding wins in the sector, to today’s environment, which has more challenges to overcome. 

Alessio provides insight into the equity structures that have worked the best for his portfolios and how he prefers to approach compensation to keep everyone aligned. “What we found is that in an environment where there is quite a bit of wage inflation, having a unified system where the management team is able to manage expenses at the center level without relying on the doctors making those calls, has been quite helpful,” he says.

Value creation from a growth strategy can be quite effective, and different firms use various approaches like de novo or acquisitions. Alessio and Albaron Partners prefer a mixture of both to add the most value to their partners. 

Integrations and centralization are two other ways to provide value to a portfolio company. Being well-integrated and centralizing support functions like billing and call centers can help a company adapt to unique challenges such as wage inflation while increasing operational efficiency. 

Featured Guest

Name: Alessio Baraldi 

What he does: Alessio founded Albaron Partners in 2017. He plays a key role in directing the firm’s strategy and investment decisions. Alessio is responsible for sourcing and executing new investments, monitoring portfolio companies as an active board member, and overseeing exit processes.

Organization: Albaron Partners

Connect: LinkedIn

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This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

This is The Capital Corner, a McGuireWoods podcast exploring investment strategies, capital structures and topics relevant in today's middle market private equity. Join McGuireWoods partner, Geoff Cockrell, as he and specialists share practical insights to inform your deal work.

Thank you for joining another episode of The Corner Series. I'm your host Geoff Cockrell, a partner at McGuire Woods. Here at The Corner Series, we bring together thought leaders and deal makers at the intersection of healthcare and private equity to delve into some of the topics that really drive creating value through private equity investing in healthcare companies. Today, I'm thrilled to be joined by my good friend, Alessio Baraldi, managing director at Albaron Capital, which focuses on healthcare investing. We're going to talk some about value creation in healthcare provider services companies. So, it'll be an interesting topic. But Alessio, maybe give a quick introduction of yourself and of Albaron, and then we can jump right into it.

Thank you, Geoff. My name is Alessio. Albaron Partners is a independent sponsor that focuses on investing and growing medical practices. So, we are acting in the lower mid-market private equity space. And we've been around since 2017, made a handful of portfolio acquisitions. And we currently have three portfolio companies, one in podiatry, one in IVF, and one in outpatient psychiatry.

So, Alessio, in thinking about value creation as an investor, we went through a period of time where the tide was just lifting all boats. And now we're in a time when there can be headwinds, there can be challenges to overcome, and really focusing on value creation is going to be key. I'd love to hear your and Albaron's thoughts on value creation in a number of dynamics. But let's start with the first conversations on this topic that you have with a potential target, group of doctors, typically. But how does that conversation usually start and how does it go?

Yeah. I would say most doctors are very skeptical about private equity ownership. They all have friends that have been scarred by the experience for one reason or the other. And they remember all the bad stories, not necessarily the good stories. And the first question that usually comes up is, why should I partner with private equity? It's all about slashing, and burning and cutting costs. And I think we have a pretty good story. And we typically put the perspective partner in touch with doctors that are in our current portfolio companies, to let them know and show that our focus is on growing revenue, and volume and not cutting costs. And that's a very, very consistent theme across all of our portfolio companies. And that usually helps facilitate the early conversations with business owners who tend to be doctors for the most part.

You're usually talking to business owners who've built a successful company. And they may be as much focused on taking a little bit of risk out and cashing in some of their chips than focusing on necessarily your ability to take them to the next level. How often are they receptive to the idea that you're bringing a different skillset than what they already had?

Usually, they're pretty receptive. And I think this has been a little bit easier in the recent past, because most business owners are really feeling the impact of wage inflation with their employees. It's been going on for a couple of years. Reimbursements are fixed. And if anything, they tend to go down a little bit. So, they're all seeing margins getting squeezed. And this is probably the first time in their careers that they had to deal with an environment where revenue's flat, margins are going down and they don't often know what to do. And so, we can bring up a bunch of examples of how we handle that across all of our portfolio companies. And these are areas where doctors don't necessarily have experience. One of them is digital marketing, for example.

What we find is most business owners who are doctors, they don't spend enough on digital marketing. And the little they spend, they don't really measure the results of. So, through that, we are able typically to reduce the customer acquisition cost quite a bit, while increasing the volume. And this tends to happen pretty quickly after we purchase a company. And we have a very, very consistent track record of doing it over and over again. That typically grabs their attention. And then other initiatives typically require having better systems in place. So, what we typically do after acquiring a company is upgrade the data infrastructure. Once we have better visibility on what's happening on the ground, that's when we can help them grow the business lines that tend to be more profitable. And those two items typically help out quite a bit, particularly in an environment where margins are getting squeezed.

Do they often express some anxiety that your engagement on these topics is going to layer in a bunch of cost that will, in the near term, deteriorate performance? How much resistance to some of those ideas from just the cost and investment side?

The digital marketing side, all the costs are variable. And we help them run those programs ourselves, between the outgrowing team and our operating partners. So, if anything, that should save them money on day one. To upgrade the data infrastructure, that costs a little bit of money. It's one-off costs, typically. And that doesn't come up as an issue that much. And part of the reason is, post-close, the doctors own a much lower percentage of the equity through their rollover. So, they're sharing the cost with us, and we are taking a big chunk of that burden ourselves. So, it doesn't come up as a big issue. Depending on the size of the company, it's anywhere between 100 and 300K of costs upfront to upgrade the data infrastructure. And that's small enough that you can cover that with internally generated cashflow.

When you do a transaction, you're usually creating EBITDA by scraping some of the dollars that historically had gone to the provider owners, either through comp or distribution. And those are going to be migrating over in one form or another to the buyer side of the table. That can create some friction in provider alignment. How do you think of provider alignment through a couple lenses? First lens being, how local do you want their alignment in the context of some PE funds are looking to have equity ownership at the top level, some are looking to have it closer to things that they can influence? So, starting first with equity, how do you think of provider alignment from that perspective?

So, we've done it in every possible way. And we've learned each time the benefit and the negatives of each approach. So, for example, in one of our portfolio companies, all the doctors that have equity in the mothership, in the holding company, which is the consolidator entity. In other portfolio companies, we have doctors owning equity at the sub-co level. And there are benefits and negatives from both approaches. With hindsight, I think having everyone on the same level at the mothership level is actually easier. It's easier to manage, it's easier for the doctors to understand what they own. And it is also helpful for them to talk to each other, and bounce ideas and they're all aligned, they're all running the same direction for the benefit of the holding company. And that tends to facilitate some conversations. So, it's less about me and you, my company, your group, and it's more about the common good of the consolidated entity. So, I think we probably at this point prefer the model where everyone has equity in the same company.

I've found that that particular question ultimately gets answered by private equity investors from a philosophical perspective, and that they will have a bent as to the competing ideas of let's have everybody rowing in the same direction, all for one, one for all kind of philosophy. Versus, the philosophy of it's way better to connect people's incentives to things that they can actually affect. From my perspective as the lawyer, the sub-MSO construct of connecting equity ownership at lower levels can present quite a bit of complication. Complicates what's happening on a backend transaction. It complicates if you're trying to get more and more granular into smaller and smaller subsections of the business. It can create a pretty complicated organization chart.

So, my bias is usually towards the mothership as well, but we definitely see different approaches. Maybe switching that to the compensation side of provider alignment. There's different schools of thought here as well, with the traditional thinking being more straight production based compensation, which is still very popular depending on the specialty, versus a more P&L based construct, where the providers are responsible for some level of local P&L. How do you think about compensation through the prism of provider alignment?

Yep. So, our bias is that the simpler, the better. And our approach across the entire portfolio is to compensate doctors based on a straight percentage of their production, of their collections. It's easier to explain, it's easier for them to audit, it's easier for them to understand it. That however puts the burden on the management team to manage costs effectively. Because you could be in situations where maybe adding an additional medical assistant supporting that doctor is going to generate maybe a little bit more revenue, but add more costs than their incremental revenue. So, that may not be necessarily over the long term the right investment of resources.

So, the way we've been able to navigate that is by spending the resources and the time to integrate the platform under a single ERP, EMR accounting system. Everything is fully integrated. And we have a management team that also provides support services at the corporate level for anything from call center, marketing, billing, and coding and whatnot. By doing that, we can rely less on the doctors being the people on the ground, managing expenses judiciously, and more on our management team knowing what's needed and what's not. And so, they can more easily rely on the doctors to focus on generating revenue and increasing their collections, rather than managing day-to-day expenses. That has worked pretty well for us, but there are other models out there.

There are a lot of private equity backed healthcare platforms that are not integrated. They're essentially collections of assets. And by design, they pay doctors based on their P&L, a percentage of their P&L rather than a percentage of their production. And they did do that, because they want to have the right incentives in place for the doctors to manage their expenses, not just their revenue. And that's also a very valued model. It's not our model. And what we found is, in an environment where there is quite a bit of wage inflation, having a unified system where the management team is able to manage expenses at the center level without relying on the doctors making those calls has been quite helpful.

I do want to come back to your thinking around acquisition integration, because I think that's a hot topic right now at a number of levels. But before we get to that, I wanted to hear your thoughts on value creation from a growth strategy. Many different sectors have different ways to go about that growth. Some of it through de novo, maybe new clinics, new locations that you're starting from scratch, some of it through acquisition and many are blended in those. Similar to the question of mothership versus local equity, I find that there's a philosophical bent on different private equity funds and buyers, either towards an acquisition strategy versus a de novo strategy. Do you have a philosophical bent recognizing that it's always a mixture of both?

Yeah. Fair enough, for us, it's been a mixture of both, for each of our portfolio companies. De novos to be an important component. Depending on the subspecialty, acquire hires to facilitate the ramp of a de novo can be quite helpful. We've done quite a bit of that in podiatry, for example. And we are doing that in our patient psychiatry. But also, in the topic of de novos, we also put a lot of effort and spend a lot of resources developing ancillary services. That doesn't work with every subspecialty. It depends how upstream you are in the relationship with the patient.

But for most of our portfolio companies, we were able to supplement the suite of clinical services provided by the doctors, sometimes with the same doctors, sometimes by hiring doctors that are specialists in areas that are related to what doctors do, but adjacent. And that's been very, very powerful. It typically doesn't cost a lot of money. It tends to move the needle in terms of revenue. And it tends to also provide a more convenient service offering for the patients that don't need to go to three, four different practices. They can find everything in a one-stop shop.

On the topic of growth through acquisitions, one area that has been presenting as a blind spot for aggregators has been a lack of post-acquisition integration. When you're trying to effectuate an aggressive acquisition strategy, the path of least resistance for acquisitions is to do acquisitions in a way where they, by and large, can exist post-closing, much like they did pre-closing. It makes it way easier to get the transaction completed. It lets you skip along doing multiple acquisitions. But what has been presenting in some of these platforms is that the failure to have centralized decision-making policies and procedures, and indeed culture, has been a real friction point, especially if the overall business encounters any headwinds. But increasingly, as upstream buyers of these platforms acquire these only semi-integrated platforms, they're encountering lots of challenges. How do you think of acquisition integration from that perspective?

Yeah. Again, our bias has been to integrate everything and put everything under one system as early as possible. And if you had asked me this question two, three years ago, I would've probably said that there is a chance we are spending a lot of resources and effort into something that is not as helpful and that buyers of our businesses don't value. Right now, we find that it's actually an attractiveness of our businesses. Our portfolio companies are quite small, but they're very well-integrated. And that has helped us deal with short-term issues much more seamlessly than if we were a collection of assets that are not integrated, where you rely on the doctor to drive the P&L. And some of the challenges that our doctors are facing these days are quite unique. It's stuff they've never seen before. Medical assistants, receptionists that three years ago we're paid 20, 30K year, now are paid 50, 60K a year, plus benefits.

That is significant. And it's the first time they've seen so much wage inflation over such a short period of time. And oftentimes, the doctors don't know how to deal with it. And so, our management team being able to show them how to do more with less has been quite helpful. And the only way to do it is by having a fully integrated platform. The other thing we've done is centralize a lot of the support functions, such as call center, billing, as well as scribes. And I'll give you an example. By centralizing billing and call center, we're able to provide better coverage to our centers and better service on average. That has increased volume of new patients, which our doctors really appreciated, as well as conversions from lead to new patient. But also has allowed us to do something else, which this is an initiative that we implemented in the last year, and that's offshoring of some of these central functions.

We started by offshoring to places like the Philippines, India, our after hour call center, evenings, weekends. They've done a really, really good job. And increasingly, as the platform grew and we needed to add call center reps, instead of hiring them at our head office, we started hiring them offshore because they were delivering very, very good results. We built on that by essentially replicating the same thing with billing and coding. There is a lot of time that billers spend on the phone waiting for someone at Blue Cross Blue Shield or one of the payers to pick up the phone and address the queries. We've essentially pushed a lot of that offshore, which has made our billing coding center a lot more efficient.

And finally, scribes. Scribes in the office can be expensive, and we essentially provide scribes to our doctors through a virtual assistant, again, Philippines, India. All those initiatives, you're only able to implement them if you have an integrated platform with a centralized corporate office. And if you don't have an integrated platform, it's going to be really, really hard to take advantage of these opportunities. And that's been super helpful to our portfolio companies in the last couple of years.

Alessio, I think Albaron does a great job of taking small companies and configuring them in a way that they can grow. And that's certainly evidenced by the success you've had in your portfolio. And I'm sure a lot more success is yet to come. I want to thank you for joining me, Alessio. This really has been a ton of fun.

Thank you, Geoff.

Thank you for joining us on this installment of The Capitol Corner. To learn more about today's discussion, please email host Geoff Cockrell at gcockrell@mcguirewoods.com. We look forward to hearing from you. This series was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this series, you acknowledge that McGuireWoods makes no warranty, guarantee or representation as to the accuracy or sufficiency of the information featured in this installment. The views, information, or opinions expressed are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This series should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.