When leading a company, few things are as important as building a strong team and empowering those team members, according to Matthew Pettit, founding partner of Seven Hills Capital.

Before Matt formed Seven Hills Capital, he founded and worked as CEO of another successful business, Ascend Dermatology. His goal was to create an organization that provided top-tier compassionate care to dermatology patients and to offer a unique succession planning vehicle for practice owners. With that expertise under his belt and his prior experience as a healthcare private equity investor, Matt took his skill set and started Seven Hills Capital, an operator centric private equity firm focused on the healthcare industry.

On this episode of Across the Table, host Alyssa Campbell speaks with Matt about successful strategies he and his team have used to address staffing challenges, how acquisition growth strategies have shifted in a post-COVID world, and his emphasis on positivity in the workplace.

Featured Guest

Name: Matthew Pettit

What he does: As the founder of Seven Hills Capital, Matthew is focused on building the best in class healthcare services companies. Matthew set out to create a long-term operating perspective to healthcare services investing.

Organization: Seven Hills Capital

Connect: LinkedIn

Acquired Knowledge

Top takeaways from this Across the Table episode 

• The key to retaining employees comes down to good recruitment and good treatment. Matthew credits Seven Hills Capital’s partner companies' skilled recruiters with creating positive work cultures and articulating the company’s goals to prospective employees. Their partner companies provide health benefits and compensations competitive with larger companies, and for back-of-house employees, it also provides in-house daycare and hybrid work-from-home options.
• Sometimes, you need to take conversations to the front end. When approaching the close of an acquisition process, it’s important to talk to the actual providers. Matthew attributes this to the large spread between buyers and sellers, as well as a tightening market in which cash flow becomes more important.
• A company is only as good as its employees. Matthew operates under the notion that the right partners will positively impact, change, and drive culture. He believes if you empower employees to grow the way they want, the practice will thrive.

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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 McGuire Woods. Across the table brings you inside the conversation with the specialists and professionals of the healthcare private equity industry.

Matt, thanks so much for joining us today. Could you tell us a little bit about yourself, Seven Hills Capital and your current investments?

Thanks for having me, Lyss. It's great to come together in a setting like this to talk about a lot of the issues, which feels like we see come up on the opportunities that you and I discussed quite often is, as you know well, but for others listening might not. I mean, it's Seven Hills, we're focusing on building best in class healthcare services companies through a mix of Denovo expansions in inquisitive growth. And if that sounds like the traditional private equity playbook, largely a lot of it is, but I think it's a little more nuanced and that we're really focused on building a select amount of companies in any given time.

I got into this business after being a CEO of a dermatology roll up that I found my way to through the traditional kind of private equity space. And at six years into Seven Hills, we've now grown our IDD and autism business, Versa Care, from really three counties in Michigan to almost nine states now. And we've grown Reliable Medical well, Lyss, with a lot of your help from a few buildings in Minnesota to 13 states. And recently we were blessed enough to partner with Catherine Grant to build expert care health, which is a primary care, an urgent care platform down in Savannah, Georgia. So we're excited to welcome that to our partnership fold and as the year unfolds, hoping to add one more great services business to the mix.

Thanks, Matt. And it has been great to support your growth over here at McGuire Woods. So for purposes of our discussion today, tell us about some of the roadblocks you've been encountering over the last two, three years in executing on your Denovo and acquisition growth strategies.

Yeah, when I think about the roadblocks outside of just the uncertainty in the broader markets, whether it be through financing or through getting the right real estate or figuring out what the right opportunities are is as kind of the market shifts, one of our consistent challenges has been getting the right people in the right seat and the labor challenges have impacted not just kind of the C-suite of companies, but also very much impacted the mainline operating parts of it as well. So as we think about whether it be opening a new location or adding on via acquisition, we find ourselves a lot more focused on who as opposed to just the how, because how can look great on a piece of paper, but if we don't have the right people to do it, that's become a real challenge to our businesses.

And Matt, my experience with the various Seven Hills platforms is that you all are somewhat unique in the healthcare market in that you have a really broad mix of labor providers, from clinicians to assistive technology professionals, other onsite home health aids, behavioral speech therapists, office folks, and so cross your platforms. There's really a lot of diversification amongst the type of labor that you need to keep the wheels moving forward. So if it's okay with you, let's kind of talk about those categories in turn. What are you seeing amongst each of those groups of workers in terms of availability to, of folks who are able to work for your platforms and support your growth initiatives?

Yeah, no, happy to address that. And I think I'd be remiss not to say that we're really privileged to work... We've got people who are everywhere from the state of California to Texas to Florida to Michigan, to Illinois to Wisconsin. I mean, we've got operations in a lot of states, which has created some labor challenges, but we've also got operations across, and you mentioned this, a huge variety of skilled and unskilled partners. We have partners who are going in and working with the fragile complex consumer who might just be doing daily bathing or daily supports, but we're also in some businesses have the skilled labor behind them that is doing PT or OT or an MD who's a medical doctor or as you mentioned, the ATPs, which is really the backbone of what builds reliable. And these are anyone with a PT or OT, sometimes a coda background who are really providing an engineering-like focus in a market where there's a very limited supply.

So we've seen constraints across all of those markets and they've all come in waves, which has been good and bad. Bad in the fact that it feels like we're always trying to solve for a new staffing crisis recently, but good in the fact that not all of it hit at once. So if I take an 18-month look back, our business really focused on the lower skilled care for folks with IDD and other complex cases. We really had a hard time coming out of COVID, and I don't know if that was the stimulus dollars, I assumed that had to be part of it or just the new reality we were facing, the work from home, but finding people to take care of those in need became a real challenge. And we never had a demand issue in that we didn't have the cases for folks to work, but we had a real supply challenge in getting those cases staffed.

And luckily enough now 18 months later, our numbers have recovered above COVID. So that's really normalized. And then I'd say going into this summer, we really started to feel, and maybe as early back as a year ago, a constraint in what I'll call the gray collar community. So these are more back office folks who support our gray clinicians so they can do what they do on a day-to-day basis, but everything from staff accountants to HR professionals, folks who spent a lot of their time at their desk in a traditional white collar job, but also kind of get their hands dirty on a day-to-day basis, which is why I kind of say gray collar, but these individuals who really saw a lot of turnover in those roles. And when we talked to people about why they were leaving one of our partner companies, a lot of the feedback we got was, I'm getting a once in a lifetime opportunity for more money. I have to take it.

And certainly people have to do that, and we found it difficult to hire in those roles at the same time. That feels like it's kind of leveled a little bit. I feel like the job market has become more accessible for both employees and employers. We're feeling better there, but as I said, it all comes in waves. Starting late this summer, we really started to feel a constraint in our skilled provider businesses. And so what I mean by that is OTs, PTs, whether those be adult or largely pediatric in our portfolio, it felt like we were making really big waves hiring partners, but we were losing them at a speed which we're not really accustomed to.

Now, a lot of it was migration going into back to school, people stepping back and not working full-time or people going in an opportunity that might have given them more hours that we've seen level off a little bit this year. But I think that's had a lot of impacts on one, how we think about value creation, but two, how we look at some acquisitions and if we think about our acquisition business, we're looking at the demand for the services, and it's hard to value that demand if you can't find a supply, especially folks who are highly educated and highly paid to meet it.

And so let's set the compensation question aside for a second. I do have some follow-ups there that I think would be interesting to discuss, but let's start with the softer side of recruitment and retainment of talent. What strategies have you been able to deploy across your platforms that you found successful besides just increasing comp for purposes of bringing new folks in the door and keeping them inside of your ecosystem?

Yeah, I think you have to bifurcate that a little bit, and with a caveat that whether it's Lauren, Katie, Catherine, or Renee who lead our various businesses when it comes to skilled provider recruiting, they are what drives our success. They've all instilled cultures that I'm proud to be a part of and blessed to be a part of, but also are very good at articulating where the company wants to go. So on that skilled provider piece, it's really talking through how those individuals can make the biggest impact on their patients, consumers or clients' lives and wellbeing. And I think we've always been good at that. I think we've gotten better at being able to provide the health benefits, some larger compensation and other ancillaries that we historically would've lost a tiebreaker on when our companies are smaller. But as they've scaled, they've been able to get closer to where some of the big nationals are, while also still having, I believe, a very strong cohesive culture, but also vision to get those people who are laying their hands on our customers and patients every day excited about the opportunities.

The second part of that, kind of the more back office C-suite, everyone who's making the trains run on time, and we've tried a lot of things. I mean, we started a daycare center in one of our back offices, which was very well received and certainly did kind of help us recruit people in that local market. We've focused on giving people hybrid work solutions, which I think has been well received in almost every case, but also we've been very upfront with where we're going with our companies and at what size or scale they need to be at to give people the compensation range, which they're desiring. And sometimes the outcome is great, let me help you get there. And sometimes the outcome is, look, I'm going to move across state lines, or I'm going to move to a different job because I can just, it's better for me and my family right now if that happens. We certainly understand it.

Thanks, Matt. In circling back to the compensation question and also the investment required to bring those softer side of the work experience up to the par that you need them to be at to compete, how have you seen that affect deal prices, both as you are looking for new investments and evaluating their financials and then determining where inside of a range of multiples you are going to land for that business? Or maybe what price adjustments have you had to make on new deals if there's a loss of staff in the time between LOI and closing?

Yeah, I mean, I guess I answered that at first, Alyssa, you've heard me say multiple times, valuation is an art, not a science. And I think that the art started getting a little more abstract over the past couple years with people really giving credit for EBITDA, it had to be earned. So if somebody had a waiting list, they were trying to get credit for adding another provider who maybe hadn't started yet, or if somebody had a facility, they were trying to get credit for having that fully booked out and run rated. We've never been big fans of giving folks credit for that, but I think now we have a lot more ground cover when we do that and just say, look guys, it's great that you think this facility or this marketing can support two more providers, and it's great that you've hired them.

We're willing to entertain some kind of earn out structures or some contingent payments, really more contingent payments on if that person is successful as opposed to giving anyone full credit for that. Now, I'm sure in certain parts of the market to that's still existing where we play in really kind of the partnership building zone, it was starting to creep in more, but we've kind of now been able to say to folks, look, we're willing to pay you for your defined earnings, but we can't pay you for the earnings that might come from people you just hired. Tangential to that, as we go to close, talking to the actual providers is becoming a more important part of our process. I think part of that's because there is still a big ass spread between buyers and sellers, but the other part of it is as market is tightening, cash flow becomes more important, making sure you don't have folks just walk out the door immediately, it is of the utmost importance.

And we've had that happen. I mean that's a lesson learned for Seven Hills and our partnerships but it's also in a market like this where labor is still tight and is still the most important input to most of our services businesses, it's becoming more customary and more accepted to have some of those conversations on the front end.

I tend to be of the belief that COVID has accelerated the timeline on which founder owners, both in physician practices and in healthcare-like businesses have set themselves up for an exit, and that we are seeing folks who aren't necessarily looking to retire in the short form, but they are looking to shed some of the burdens of ownership that those folks are going to market faster than they maybe would have otherwise. I'm curious from your perspective of in the private equity and independent sponsor space, has labor affected the timeline at which you're looking to exit any of your platforms, either accelerating that exit timeline while you have good teams in place, or delaying your exit timeline until you can further build out your teams to make sure that you are capturing sort of the EBITDA that you'd be uncomfortable giving a founder credit for?

It's a really interesting question, and I would say the answer is no it hasn't impacted kind of our value creation thesis. As you know, Versa Care is really something we will probably continue to build with Lauren for a very long time. And as I think about other opportunities specific to Reliable, I would look at that and say, the market is valuing labor. And I think we have a very unique value proposition under Katie's leadership to continue to add labor. Largely that's getting recruited by some other bigger companies, and as long as we can continue to add that labor, if anything, it reinforces our belief and continuing to reinvest in these businesses as opposed to trying time liquidity around it.

And one last thing I'd like to talk about, Matt. I think that we would be mistaken to skip over how well Seven Hills and your executives across your platforms do at integrating leadership at the targets that you're looking at, that you identify as having really great talent and the ability to really scale their management and their business expertise. So without revealing any secret sauce, how did your ethos around supporting your leadership and really integrating your operational capabilities with the CEOs at your platforms? How did that develop? Or do you have a principle that you would recommend to others to emulate your success?

What I would say is we're lucky to have great partners. I think our biggest diligence and opportunities that we've done and that we've candidly passed on over this is an ability to be working professionals with their partners, but also friends and have a long-term trust and respect for each other. And a big part of that is being able to say, I'm not an operator. I mean, I served as a CEO. I won't think I was that great at it. I think I was good at some aspects of it, but the loneliest job in any company is the CEO. I mean you're rowing the boat oftentimes, it feels alone. And in my view, the last thing that person on that boat wants is a partner, an investor, a sponsor to pour water in the front of the boat or to create waves that don't need to be there just to serve one of their needs.

You've really got to find a way that shared success drives shared outcomes. I mean, our motto for this year is positive vibes, drive positive outcomes. And I say that because if you give your partners the ability to impact, change and drive culture, values and growth the way they want to, if you have the right partners, they're going to do it. So if you're comfortable with that, I always tell people, empower those around you to be really successful. And from a labor perspective, I look at the back office for Reliable Medical and the Reliable Medical has built an incredible team around Katie, well said differently. Katie has built an incredible team around herself, and she's done that in various offices.

We've got an executive office down here in Nashville, which by the way, Alyssa, it's 65 degrees right now. I don't know what it is in Chicago, but we've also got folks up in Minnesota. We've got folks in Texas, we've got folks in California, we've got folks in Florida. We've been able to recruit the right people for the right roles and put them in spots that, whether that's they're in the office every day, they're working remotely, they're in a hybrid type role. They've been able to succeed, built on the basis of trust and everyone rowing that boat in the same direction.

Well, thank you so much for joining us today, Matt. We really appreciate hearing your insights and your experiences.

Thank you for hosting me, and I look forward to many more conversations both in the public square and in the private one as well.

Thanks, Matt.

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 McGuire Woods for informational purposes only. By accessing this podcast, you acknowledge that McGuire Woods 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 McGuire Woods. 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.