On this episode of Across the Table, host Kayla McCann Marty is joined by Alexis Rathborne, Managing Director of Investments at Trident for a discussion on the healthcare market and the investment thesis driving Trident’s team. Alexis explains how she applies Trident’s investment thesis – that identifying the right investment and operating partners is key to successful acquisitions – to the specialized physician investments she reviews.   For Alexis, the right deal is all about finding the right asset within those specialties and the right partners to work in those sub-industries.

This approach reflects Trident’s belief that their operating partners–including CEOs, physician partners, and others on the ground–are just as important in driving their success as anything else, and they have no problem sharing credit with them.

Throughout the episode, Alexis shares insights into popular sub-sectors of healthcare investing that have interested the Trident team, along with some of the current challenges involved in making an acquisitions deal. She and Kayla also share the opportunities they see in the market and what they anticipate looking ahead. 

Featured Guest

Name: Alexis Rathborne

What she does: Alexis Rathborne is a Managing Director of Investments at Trident. Since joining Trident in 2019, she has been instrumental in executing Trident’s investment thesis. Prior to Trident, Alexis led direct investing at Clear River, a single-family office in New York City, with a focus on restaurant investments.

Organization: Trident

Connect: LinkedIn 

Acquired Knowledge

Top takeaways from this Across the Table episode 

• Having the right asset and partner makes an investment interesting. According to Alexis, Trident is interested in the optometry space due to the level of unconsolidated practices and the quick synergies that can be exercised in the industry.
• Independent sponsors bring unique strengths. Working with operating partners or independent sponsors can help you find unique investment opportunities that are off the beaten path and not banked.
• Valuations have been challenging in healthcare. With tightening debt markets requiring either lower valuations or larger equity investments, valuing acquisitions has been challenging. COVID has also affected practices differently, and there has been a disconnect between valuations and intrinsic value.

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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.

You are listening to Across the Table, a healthcare private equity podcast brought to you by McGuireWoods. Across the Table brings you inside the conversation with the specialists and professionals of the healthcare private equity industry.

Hello everyone. Thank you so much for joining us for another episode of Across the Table. This is Kayla Marty. I'm a attorney in our healthcare group in Charlotte, North Carolina, and I'm going to be speaking today with Alexis Rathborne, a managing director of investments at Trident. We're so happy to have her on.

Alexis, thank you so much for joining us. If you wouldn't mind, at the beginning of every podcast, we always ask our guests to introduce yourself, tell us a little bit about your organization and tell us about some of the things you're most excited about and focused on right now.

Absolutely, and thank you so much for having me on. It's always a privilege to get to chat with you about these types of things. So my name's Alexis Rathborne, and I'm a managing director at Trident. We are a lower middle market private equity fund. We focus on three core sectors, consumer healthcare services and industrials. We're really at our core small business investors. So we look at businesses that are typically between, call it 2 and 20 million of EBITDA. But I would say we typically skew between, call it, 3 and 10. And our whole business model is really around penetrating a piece of the asset class and private equity that most private equity shops sort of deem as too small. And so we use a combination of technology and operating partners to access that stage of the market. And as it comes to healthcare in particular, we really focus on roll up strategies primarily around specialized physicians.

Yeah, absolutely. And I think that that's been an area that we've seen a vast amount of interest. I know that you and others attended our healthcare private equity event in Chicago this year, and there was a high level of focus on plastics, cardiology, and different other sub-sectors. What type of acquisitions have you been most focused on and excited about? Is there a particular sub-sector or a few particular sub-sectors that you think are really hot?

So we have a platform in the optometry space, and so I would be remiss to not highlight that as an area that we think is extremely interesting. I think just the level of unconsolidated practices throughout the country make it incredibly compelling. I think the synergies that you're able to exercise pretty quickly in an industry like optometry, not necessarily as complex as say a plastics or a cardio. So for us, that was our first foray as Trident into in healthcare services. But we see deals really across the spectrum. And we have spent time in plastics, we've spent time in cardiology. We have a particular thesis that we're investigating right now around subspecialties in cardiology. So I think in our minds it is less necessarily about the industry and the subspecialties specifically, but more about finding the right asset within those specialties and identifying the right partners to be working with in those sub industries.

Absolutely, and I'm glad you mentioned your all's thesis and the way in which you identify acquisitions, because I think that you all are really thoughtful in that space and have really spent a lot of time thinking about who is the right partner who focuses on the right elements of different businesses for you all. Do you want to talk a little bit about your thesis overall or any elements of your thesis that you think would be interesting to our guests?

Yeah, so we are fundamentally believers that people make the world go round and people run businesses. And so for us, it really is a primary part of our investment thesis is identifying the right operating partners, identifying the right partners to invest alongside. And understanding that in many scenarios, we might not be the most specialized group in a particularly complicated subset, but what we are very good at is finding the right partner to bring into that investment with us and to make sure that we're really using the breadth of our network to think through the entire ecosystem of whatever that particular investment structure is. And I think one area that we have absolutely no problem sharing credit with is that we believe very much that our operating partners are CEOs on the ground, are physician partners, are just as much the drivers of our success as anything else.

And so, again, I think focus and understanding that that is what is driving so much of our value creation strategies is what allows us to be appealing as partners to doctors and physicians who are looking for partners on the capital side.

Absolutely. And Alexis, if it's okay to ask you, I'd love for you to talk a little bit about your experience with independent sponsors just because I know that that is a focus area for you all, and that's not the case for all private equity funds.

Yeah, absolutely. And going back to the idea of making sure you've got the right partners at a table, a key part of our investment thesis is, again, working with either operating partners or independent sponsors to find really compelling investment opportunities that are not banked, that are off the beaten path. And finding partners who have really strong sub-sector expertise that they're able to bring to the table. And independent sponsors, I think as a cohort have a really unique ability to do that. And I think, listen, independent sponsors come in all shapes and sizes, but the seasoned, specialized groups of individuals, whether they have a background in private equity or a background in operations, in our mind, are really fantastic partners moving forward in these kinds of transactions.

Absolutely. And it's an emerging space and people have been very focused on it. So I think that it's of interest of a lot of our listeners.

Kind of changing gears, but still in the vein of acquisitions, what do you think has been the most challenging aspect of acquisitions that you've seen this year? We've heard a lot of people talk about it's the debt market we've heard other people talk about, it's rebounding from COVID and trying to really understand what the businesses are going to look like in a post COVID era. What has been your experience with the most challenging aspects of acquisitions you've been looking at?

I would say broadly it's been valuation, and I think the reality is that everything that you just touched on plays into that. I think the tightening debt markets fundamentally or make the implication either valuations have to come down or equity partners have to be willing to write larger checks. I think that becomes challenging as you're thinking about returns. I think really understanding what happened during COVID for different practices, understanding whether there was a COVID bump or a loss of revenue in COVID, and understanding how that really plays through in a post-COVID world. And I think really the disconnect that happened at the end of 21 into 22 when valuations were still really strong, really high, and there was this expectation that any practice in any sub-sector should be trading at X, Y, Z multiple. And that I think was the mentality that people were holding onto for a good amount of time. And there were so much money chasing the same assets that people sort of stopped asking the question, are we paying the right price?

And I think where I sit and something that we talk about extensively on our team here is are we paying the right price for these assets that we're looking at? And understanding are you able to create enough intrinsic value in these businesses as you grow them to justify the price that some people are asking for? And 98% of my job, for better or worse, is saying no to deals that we think are overpriced. Because I can tell you from where I sit, the biggest mistake private equity can make or any investor can make is overpaying for assets simply because it's an interesting trend that you see your cohorts around you chasing after. And so I think for us holding onto that discipline in the face of so much market turmoil, whether it was COVID, it's the debt markets, whether it was recently what happened in the banking sector, sort of holding the reins and making sure that you're being true to your investment thesis, I think for us has been crucial.

I agree. I think that most of our clients and contacts have acknowledged that for some time now there is an outsized seller expectation versus reasoned investing. And some investors have been meeting those seller expectations and some to their detriment. And others have been staying, as you said, true to an investment thesis and waiting for the perfect investment that makes sense from a fit perspective, from a monetary perspective. And those tend to be paying off quite well. I think one of my expectations and observations has been that people that overpay often feel more pressure to perform, and sometimes that can lead to investments that either underperform or outsize expectations with physicians. But I think you're right, we are consistently hearing that as one of the most challenging aspects.

With challenges often come some opportunities. Are you seeing certain trends? Are you watching certain trends in the industry that make you very excited or things that you're really focused on and hoping play out? Anything that you want to highlight that are really, really interesting and exciting trends?

Yeah. I mean, I think for us in particular, we tend to focus or try to focus at least in areas that are less consolidated. And so when we think about exciting investments, it really is about trying to think through the right geography, the right asset class, the right partnership in terms of investing in a business. And I think what we've seen in terms of the businesses that we've invested in thus far is that when you are properly capitalizing these businesses and you're able to acquire assets at attractive prices and put the right resources in place with the right people, you are able to capture that growth story that you had originally started with. And I think for us, when we think about what's exciting, it's watching that unfold and then taking those learnings and then trying to apply them into different and new investments and different.

And so I think where we're seeing areas of excitement is, for better or worse, private equity is now a word that most physicians are very aware of. And so you're seeing increased opportunity to penetrate markets that have either been relatively closed in the past or thought to maybe be unattractive to outside capital, really open up to the idea that, again, with the right partnership, with the right incentives, you can create really lucrative investments that are in practices that are giving their patients really great healthcare.

And so I think for us, what we find exciting is being able to pair those two things together, which is what we're trying to focus on when we look at investments. Where are the industries that private equity, where Trident, where our ethoses, can enhance a practice and help bring the right business mindset or operations focus to a series of practices and not just create value for ourselves and our physician partners, but also create a fundamentally better experience for the people who those physicians are caring for?

Yeah, absolutely. And I think that that probably dovetails in to who you partner with. That is the driver of the ability to deliver on better healthcare for patients, better investments for your investors, and there is a synergy where those can meet with one another. I think sometimes private equity has gotten a bad wrap if those things have not been perfectly in sync, but that often goes to the fundamental question of who you're partnering with, how much you're paying, is it a good fit, is it the right trajectory for your organization?

In my view, where private equity has the biggest problem is when you look at a business, particularly in healthcare, and all you try to do to create value is cut cost as opposed to trying to build a better business. And I think an area that we spend a lot of time on is making sure that everyone in our value chain, every one of our shareholders in that value chain is reaping the benefits of the growth that the business is creating alongside our LPs in our funds.

Absolutely. Absolutely. And obviously those are the things that you're really excited about. I am sure there are trends that are also giving you concern, whether it be on the debt side, whether it be on the availability of quality practices that have pricing expectations that meet yours or something else. As we kind of wrap up, what trends are giving you concern or what things are you watching really closely?

I think certainly on the debt side trying to understand where we're going to be, or at least a sense of what could happen in the next 18 months is something I'm sure everyone in finance is focused on at the moment. And you're certainly seeing that come through as you take deals to debt partners and think through capital structures. I think that will continue to be the case for the next year. And so watching how that plays out I think is going to be critical. I think for us, one of the things that we always go back to is just because you can put two businesses together doesn't necessarily mean you should. And so in the same vein of saying we're seeing a lot of opportunity to penetrate different subspecialties and create real value, we're also just constantly seeing different sort of assets thrown together and trying to be shown as a transaction.

And I think for us, again, making sure that businesses are actually meant to be together and that you're able to create real value is crucial. And so just because you can add things together and it does technically make the revenue higher, does technically make the EBITDA more, doesn't mean that those businesses are going to integrate properly together. So understanding the underlying culture of businesses I think is just as important. Understanding the underlying synergies that people are thinking through in the underwriting process. You have to have more than just what you can put on paper. And I think more often than not, people underestimate how complicated some of that integration can be, and everybody loves to put more synergies on a page and be able to create a bigger pro forma EBITDA. And so I think for us, that's something that we're hyper aware of.

I agree. I mean, we say around here that there's only so much scratch tape you can put together before it falls apart. So I think that the integration is critically important to be in a position where you have a high functioning patient care focused business, which I know is what everybody strives to achieve. So I think you're spot on that.

But thank you so much for joining us. And our listeners, thank you so much for joining us on another episode of Across the Table. We look forward to having you tune into our next event.

Thank you so much.

We appreciate you joining us on this episode of Across the Table. To learn more about today's discussion or to contact us, please visit our website at McGuireWoods.com. We look forward to hearing from you.

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.