On this episode of The Banker's Corner, McGuireWoods' Geoff Cockrell invites Mikel Parker, Head of Investment Banking and Managing Director at AMB, to discuss current valuation trends in healthcare IT and other sub-sectors. 

As a firm, AMB broadly focuses on healthcare services, healthcare IT, and pharma services, but during this episode, Mikel mainly discusses healthcare IT trends and insights to the company’s services in this sector. 

Mikel breaks down the healthcare IT market, pinpointing four main sectors within the concentrated field, as well as the two types of buyers he comes across in his work. In a COVID-world, the trend toward more digital monitoring and healthcare access continues to grow, opening up opportunities for investors and companies alike. From ongoing trends to down-the-line predictions, Mikel discusses all things transactional within the world of AMB, particularly this growing field of healthcare IT.  

Featured Guest

Name: Mikel Parker

What he does: As the Head of Investment Banking and the Managing Director at AMB, Mikel handles client strategy, sourcing deals and transaction execution. Over the course of his 20+ years in financial services and investment banking, Mikel has executed transactions across a wide spectrum of industries. 

Organization: AMB

Connect: LinkedIn

Notes From the Banker’s Corner

Top takeaways from this episode

★    Healthcare IT has been, and will continue to be, a popular trend. Mikel predicts healthcare IT will continue to prove profitable as companies adjust to this new COVID-world where the digitization of healthcare is so much more vital than it was pre-pandemic. 

★     The market is shifting models. Trends seem to show that companies are shifting from transaction-based models to recurring-based models. In other words, companies are changing models to improve their profit margins by switching revenue models. 

★     There are four sectors of healthcare IT. Throughout his many transactions with AMB, Mikel has observed four main categories, or sub-sectors, within the realm of healthcare IT: revenue cycle management, patient engagement, HIM coding, and services-side monitoring. As an advisor, each of these needs to be tended to and organized in order for the client to achieve the most success. 

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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 Banker's Corner, a McGuireWoods series, exploring investment trends, solutions, and business issues relevant in today's private equity and finance industry. Tune in with McGuireWoods partner, Geoff Cockrell, as he and specialists share real world insight to help enhance your knowledge.

This is Geoff Cockrell from McGuireWoods. Welcome to another episode of our Corner Series, where we bring together deal makers and professionals in the intersection of healthcare and private equity, talking about trends in deeper sector dives. I'm thrilled to be joined today by my good friend, Mikel Parker at AMB Advisors, one of the leading healthcare investment banks that focuses on middle market transactions and healthcare provider services, healthcare IT, and other related fields. Mikel, maybe give a brief introduction of yourself and AMB, and then we'll jump right into it.

Yeah, sure. Mikel Parker again. I head up the healthcare investment banking here at AMB. I am based in Atlanta and the rest of our team is in Charleston, South Carolina, on the investment banking side. Been in the, let's call it, the investment banking, financial services op side for approaching a little bit north over 20 years, and nice to be here today. Thanks for having me, Geoff.

Thanks Mikel. One place we could start is to break it down into some more specifics. What are some sectors that you're spending a lot of time on? And then we'll delve into one of them.

Yeah, so fair question. So we broadly, our firm, focuses on healthcare services, healthcare IT, and also pharma services. Right now, we're spending a lot of time in that healthcare services, healthcare IT area. We're seeing a lot of activity across urgent care, home health, hospice, doing some stuff in the skilled nursing space, also your revenue cycle area, and then also giving it to some activities in the payer services side. But broadly, I'd say healthcare services, healthcare IT and pharma services, and we'll focus on both sales side and buy side transactions for clients and then also capital raising.

Let's focus on healthcare IT. You mentioned a couple, but maybe pulling back a little bit, how would you segment the healthcare IT market? What are the big categories that you would put things into?

Yeah, fair question. So in the healthcare IT front, they would look at it in a few ways. One would be more of your revenue cycle management space, so things across that sector in that area. And so we are doing something and we've got something actually live in market now in that rev cycle. HIM coding area is number one, but then also thinking about patient engagement and those tools, communication tools, in the healthcare IT area. And then I'd say, third would be within healthcare IT again broadly, and we can even go further, but also in your, let's call it, your services side around monitoring, things such as remote patient monitoring, complex care management, in those fronts and really what you'll see going into and delving into the at-home space and a lot of monitoring taking place there.

What size do you usually encounter these companies? They can all obviously start as a earlier stage technology, build up into a cash flow business. When are you usually encountering them?

Yes, we will, and I'll talk more on enterprise value wise side, our enterprise values will typically range and we'll average around the $100-150 million plus area. I'd say we will see things perhaps that can go as low as, call it 20 million, 30 million, but typically north of $50 million, $50 million plus in that range. So we're not necessarily getting into the early stage things that you may see in the healthcare IT space. There's a lot of folks in that, say, telehealth area as one area, or maybe some folks do some stuff on the AI side that maybe younger stage companies. We have a lot of those opportunities and companies come our way. We do try to find homes for them that it's something we are not going to work on ourselves or we'll assist with, but we do try to find paths and provide good advice on where folks may find the solutions that they're looking for, even if it's something we don't work on directly in that younger stage base.

On the provider services side, you're obviously delving into governmental reimbursement and just a higher order of both risk and familiarity that you have to have to be an effective investor, and that pushes a number of potential buyers out of that segment. There's obviously a lot of people that pursue provider services, but you have to more know what you're doing. How would you describe the different types of financial buyers in healthcare IT?

Yeah, good question. So you hit the nail on the head there on that point with your question there, as well. So we can segment our buyer universe on the financial side, financial sponsor side, to your point, those that will take that reimbursement risk and those that will not. It's a pretty clear distinction for a lot of folks. We do see a lot of interest in buy groups that do and are open to taking that reimbursement risk and really stepping into the provider services. Others that would like to still be in that provider services space, but aren't looking for the reimbursement risk, they really are looking at tools and services that are selling into the provider services. So it could be something such as a scheduling tool as one, or EMR businesses, et cetera, those kind of things as well, too, for those that do not want to take on the direct reimbursement risk and also the associated challenges around recruitment, physician recruitment, employee retention, things of that nature as well, too. So we do see a clear distinction in buyers that are in one or the other, but we do see a lot of interest in both though today.

How do you think of pricing on these deals in a traditional framing of multiples of [EBIDA 00:06:13]? What's the range that you see in healthcare IT, and what are some of the drivers that puts you up or down in that regard?

Yeah, so healthcare IT, with the tech aspect of it, it's really going to depend on, is the company and is the target a profitable technology company, or is it really one that's really looking at more of a revenue top line-based business that's going to really be focused even more so, or, I'd say, more emphasis around ARR or recurring revenue, so to speak. And so that technology play space, there's a lot of focus and you'll obviously see a lot higher valuations on companies that are in that recurring revenue space or SAS-based businesses. But then there are others though, and there are others and I'll get to multiples here in a second, too, but there are also others though that may have a blend, I'd say recurring revenue plus transaction based revenue as well, too.

And so with those, we are seeing a trend with where valuations are trending, I'd say in a higher realm for technology based, I should say SAS-based businesses. We are seeing a trend where companies are looking to try to convert those transaction-based services to a recurring-based model. And you'll always have implementation fees and things of that nature as part of your overall, I'll call it, offering, but obviously the more you can shift into that recurring-based revenue model and really show that track record of renewals, and, I'd say, increasing top line on the recurring-base side and higher margin tied to that as well, too, the higher than multiple's going to be.

And so your multiples for that space can really trend anywhere from, let's say three, four times, five times, but in some instances, can go up to double digits depending on the value proposition of the business, and this is of revenue. If you are seeing someone that's profitable as well, and not just a growth company that has a negative [EBIDA 00:08:16], the story begins to become even much more so powerful from evaluation standpoint, and in obviously from, I shouldn't say obvious, but also from a demand standpoint, as well, too, in investor interest, in appetite standpoint. To the extent you can show a high recurring revenue base plus proof of concept on being able to scale on a profitable basis, the higher you will certainly command from a multiple standpoint.

When you're engaging with a company in healthcare IT, what are some problem areas that you'll see in a company, whether it's a heavy concentration of customers, or what are some of the problem areas that potential sellers should be cognizant of?

Yeah, you have a lot of the, what I'd say, the traditional problem areas that you would see in any type of business, regardless of the sub-sector. So what you just mentioned that concentration risk, proof of renewal entraction there, and then also collections though, too. So one thing I've seen even recently, too, if you want to drill in, if you were to look at one area, let's say remote patient monitoring area, seeing some folks that have had perhaps issues on the collection side, so to speak. So billing is there, the contracts are there, but the collection aspects and the true cash [relax 00:09:34] aspects could potentially have some challenges to it in that area.

Let's say, secondly, it is the underlying technology itself. What's the actual platform? Is it truly proprietary in nature, or is it really, perhaps, some small IP, but really a bolt on of outside technologies to really create the overall offering? Still can be very interesting, but it may not necessarily have as much of a, say call it, a halo around it to the extent that the offering is really relying upon third parties to really support the whole capital stack in a large way.

Those are some areas for sure. I'd say then outside of that, it's really your growth play and your growth strategy and what's on the roadmap on the technology front, too. Today, it's always good to show what you're doing today and to have that, let's say, solid client base there for your business, but it's really what's on the technology road roadmap and how much invested capital's needed to really hit the next stage of your growth on that actual offering side. So I'd say those are the key areas, I'd say overall, that technology aspect itself, and is it actually a true proprietary-based technology when you really dig under the covers and you can really see what is there versus not there within the company that can sometimes turn into a problem.

I'd say lastly, actually, too, thinking further, it's really the onboarding and retention of your clients and/or if it's something that's, say, focused on patient engagement side. It's retention of the actual patient population or users or members that are actually on that platform. What's the actual ability to retain and engage the actual membership that's tied to your actual offering? Onboarding and retention are really key things. You can have the prettiest tool out there, but if you can't, once you sell it into a certain customer, if you can't get the onboarding or user interaction there, it really does drive down value as well, too. So that's actually very important from a KPI standpoint, overall.

As you scale up in size, let's call it a $100-150 million transaction value, what's the mix between financial versus strategic buyers in the healthcare IT space?

Good question. Yeah, as you're starting to trend higher, you would be looking at what I'd call, more so, the quasi-strategic to strategic players, more so, really that 100-150 million plus. That still is going to be a little bit more lower middle market-type value. So you will certainly have some of that, I'd say, leading even financial sponsors that may not have a platform company in place that would have a high interest to the extent that they have a strong thesis in a certain area. But as you get to the 100-150 million plus valuation, you are able to attract some of your strategics more so than even just the financial sponsors, though.

But again, I'd say it's a nice valuation range to step into for a buyer. And I think that still leaves open, though, a wide market to cast out there, though, to both strategic and financials. It's not large enough to where we're talking getting into the billion dollar plus range, where that then starts getting more interesting around who you're talking to. 100-150 million plus, you're talking a revenue business that's still has obviously gotten through proof of concept, is obviously showing good traction, but it's right in the wheelhouse of attracting, I'd say, a pretty equal balance of both strategic and financial.

And going back to the sub-sectors, are there one or two that you are particularly bullish on that they're getting a lot more interest than maybe in a couple years back? I know those things shift around. What are the most bullish right now?

I'd say, this is me talking here and looking at what's going on in the market in general, I'd say as you continue to have these trends going towards, call it value-based care, and potential shifts from fee-for-service, think that just the backbone of revenue cycle management, I think is still going to be very important. So with that, it could be both on the provider side and payer side for technologies in that place. So on the provider side, some of your, I call it, your middle rev cycle type stuff, and really, you call it improving on the post-discharge, pre-billing type work, and the ability to use AI and other insights to improve what you actually are billing out there, I think, is going to be important and continue to be important. On that same note, on the payer side, it's going to be more of your payment integrity type aspect as well, too.

Again, better insights, being able to make quick decisions on what is reimbursable, what's not, what's the right rates, duplicate invoices or duplicate claims, all that kind stuff, I think that that area is going to be really important on both the payer and provider side and pretty bullish on that aspect. And there have been some hot transactions in those spaces on both sides. I do think that there's more to come there.

Two would be, it's a question around... Talk about the monitoring side. It's not necessarily monitoring, I'd say, per se, like what you'll hear in the traditional world of remote patient monitoring at least. I think it's more of that complex care management or complex care or chronic care management space. I think that that is actually will be a very hot space for some time, as well, with not only the movement and shift to the at-home area, but also just a simple fact of just scalability here and being able to monitor these high chronicities, high cost members out there, or individuals or patients out there, in the, call it, in the healthcare landscape. Being able to manage them at scale when we're at the cusp of really, call it, a lower labor supply, labor shortage, but still trying to manage your overall cost of care, I think that that technology and technologies that can be very effective in monitoring/alerts and have insights in preventing or stepping ahead of, call it, episodes before they happen. I think those technologies will be very sought after and should be.

Well, Mikel, thanks again for participating in this episode. Your insights on this very active sector were super helpful, and thanks again for joining us.

Great. Thank you, Geoff. I appreciate the time. Take care.

Thank you for joining us on this installment of The Banker's 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.