“We believe in partnering with people that have that passion, that really want to put the business and the patient over themselves. That's really the secret sauce of microcap investing.”

In this episode of The Corner Series, McGuireWoods’ Geoff Cockrell welcomes healthcare investor Gordon Maner. Gordon is the CEO of AMB Wealth, a financial services firm that specializes in asset management and healthcare investment banking. He is also the founding partner of Frontline Healthcare Partners, a private investment firm focused exclusively on investing in lower middle market, distributed healthcare businesses.

Tune in to hear Geoff and Gordon’s discussion about investing in healthcare, including the microcap side of healthcare, growing areas, such as behavioral health, overlooked sectors that provide good investment opportunities, and creating a world-class board.

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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 Corner Series, a McGuireWoods series exploring business and legal issues prevalent in today's private equity industry. Tune in with McGuireWoods' partner Geoff Cockrell as he and specialists share real world insight to help enhance your knowledge.

Thank you for joining another episode of The Corner Series. I'm your host, Geoff Cockrell. Here at The Corner Series, we bring together deal makers and thought leaders in private equity investing and healthcare. I'm thrilled to be joined today by my longtime good friend, Gordon Maner. Gordon is the CEO of the AMB companies and the founding partner of Frontline Healthcare Partners. Gordon, maybe start us off by giving a little intro of yourself and Frontline and AMB, and then we'll jump into some topics.

Hello, hello, Geoff. Good to see you again, and thank you so much for having me today. I am Gordon Maner. As you mentioned, I work with the AMB group of companies as well as the Frontline Healthcare Partners.

Starting with AMB. AMB is a financial services firm that really specializes in asset management and healthcare investment banking. We've been in business for about 23 years, and I've been with the company since 2015 and the last three years as its chief executive officer.

A couple years ago, some friends and I, we started Frontline Healthcare Partners to really take advantage of the opportunity to invest in the microcap side of healthcare services. We have four partners and three supporting individuals as well as a small Frontline Resources Group. Today, we have four portfolio companies and are actively looking to deploy more capital across the microcap space of healthcare services. So again, delighted to be here and thanks for having me.

Gordon, when investors think about where they're going to deploy capital, sometimes it's sectors that have a particular characteristic and frankly, sometimes it's the whole herd moving into some new green space where there's some available consolidation. When you think of where to deploy capital, both in general and as a microcap investor, how do you think about where that should happen?

It's a multi nuanced question, or answer rather, and it's an important question because generally speaking, we look to have a key theme that we invest in and hopefully we'll spend some time talking about those themes. And usually, we also want to have a great thesis. Sometimes, though, the reality of the situation presents itself whereby we meet a great company and we may not have had a thesis in the sector, but we create one after meeting the business.

Investing in the microcap side of healthcare, it's super important to get a lot of things right. It's also one of the more exciting places to invest because it allows you the opportunity to do a lot of things right and have a lot of different chances to win on an investment.

But one of the key things that we don't often hear others talk about is really that founder DNA. We define the microcap as investing in companies under 5 million of EBITDA or so, and the founder is often very important to the story of the business and the future ongoing success of the business. So it's really important that for us to define founders that have that DNA within the business, and that DNA usually should mean they're really passionate about creating a good service, a good patient experience, and then have built that culture such that it replicates across the rest of their employee and management team. We take a couple of steps as an investor to really ensure that that's there, but also to make sure that that is even elevated after we've made an investment. And we'll come back and maybe talk about a few of those things.

But first thing in the macro side and looking key themes to invest in, right now we're really studying a couple key areas and we've worked on a number of urgent care and primary care type deals together. That's been an area where I've spent a lot of time throughout my career. And over the last several years, we noticed that the primary care volume is down when you take out a lot of the Covid noise, and we see a couple things that are happening within that sector. And over the last several years, it's been no surprise, but retailers have really pressed into the sector pretty heavily and they've taken a lot of volumes and they've done it at very low cost.

So in one sense, it looks as though primary care and bottom of the pyramid healthcare is really being somewhat commoditized and I think that puts a lot of pressure on other operators. So we still believe that it's a good consumer-centric way to make an investment, but we look for key areas that may be outside of the path that everyone else is searching. One of those might be, and looking at rural opportunities, and that's an area where we're spending a good amount of time now. We really try to look at these broad themes and try to find an area to solve one of the challenges within those themes. Primary care commoditization is one of those, and one particular answer that we have is looking at rural communities in order to make an investment.

Is it sometimes looking for areas where a headwind in a particular sector or idea creates a tailwind in something that may be adjacent to it? Is that one way of thinking about your themes?

It is certainly one way. And in the case of primary care, there is a slight headwind, but there's been a lot of overlooked areas that provide a great investment opportunity. Access to good healthcare in rural markets is a severe problem. Healthcare education in rural markets is also a real problem, and so the opportunity to play really an urgent and on-demand medical provider as well as a primary care provider in those markets, we think is still really strong.

Another area that just is exploding off the page for us is that of behavioral health, and we look at the trend of... Really, healthcare consumption and volumes have been down for the last several years. When you take out covid and really one of the only areas that you can look at with real growth is that of behavioral healthcare.

Another unfortunate trend that we've followed is the mortality of young people is way up, and that's driven primarily between accidental overdose deaths and suicide. So for us, behavioral healthcare investing across helping young people with major depression and helping addicted individuals get clean and come to recovery. Those are two areas where you're just investing into that trend that are really important for us., And we have two investments that I think would exemplify that. One in Bay Area Clinical Associates, which is a psychiatric business focused on young adults and adolescents, and the other would be Porchlight Health, which is focused on really opioid addictive patients across Colorado and New Mexico.

One of the areas when I'm talking to investors that they spend a fair amount of time thinking about, and I want to gauge your thoughts on, is the idea of what growth looks like and the trajectory can be for a microcap company is different than what the growth trajectory and what that might look like at a larger or even much larger scale. Obviously you can pull some different levers and have more meaningful growth at the microcap level. How much do you focus on what the prospects are looking like upstream? Because obviously if the big box acquires in a particular sector are having trouble, that's going to ripple down. How do you think about the ultimate buyers down the line?

Yeah, it's a great question and I think we keep it as a key consideration as part of our value creation plan, which like many other private equity firms is something that we do. Some call it an under day plan. For us, it is really the plan that takes us from really inception of the investment into the eventual exit, and that eventual exit usually has an idea of who the eventual buyer may be. For us, we're always trying to make an investment where we're going to fill some sort of strategic hole. While we may sell investments to other private equity funds, we are certainly going in thinking that this fills a strategic hole and that there is a strategic acquirer in mind for our investing.

The other really exciting thing for us is that it does allow you to have a lot of different opportunities to win, but when we go into an investment, we are looking to really get a growth of the underlying business three to five times, and that ultimately comes with a fairly large growth in the underlying multiple between our entry and exit. So just when you think about from a growth perspective of the deal, it provides two ways to land versus a traditional middle market player who buys a tenant expects to sell a tenant.

So within that, there's obviously a lot of tools and tricks that we need to bring to bear in investment, not least of which is catalyzing a small company and getting it private equity suitable and ultimately suitable for that next buyer. Usually that's intense financial management and investing across that, systems and technology, and then bringing in management that can really run a true little market business by the time we exit.

Also, part and parcel to all of that is really creating a world-class board. We try to have a good sized board in each one of our investments. We want to have someone there that can really fill... The key part that we think is a weakness on the company usually is around pair of relationships and having folks that can really understand negotiating payer rates and doing the right thing by your payers. The other is frequently since we're oftentimes investing in consumer oriented healthcare businesses, de novo growth and retailization is a big part of it, so folks that can really understand that customer and patient experience as well as we want somebody that's actually been in the industry, that's had a successful... That's done it before so that they can really give some guidance to our management team and be the person that says, "Hey, I've been in that seat. I've done this right. I've done this wrong. And let me help you make the best choice."

You mentioned the founder DNA as one of the key markers that you're looking for when evaluating platforms. The skillset of a CEO and founder taking a business from nothing to $5 million is often viewed as different than the skillset that will take a company from five to 10 and above 10 is its own creature again.

When you're looking at that founder, DNA, sometimes when I have the conversations with an investor, they're looking for a constraint that they can solve, and sometimes that is the leadership of the CEO. You're describing it more as looking for a leader that can take it to that next step. How do you think about the growth trajectory of a CEO and are their natural boundaries of their abilities to take it to a different thing just because it's a different skillset?

Yeah, great question. So I'd say first of all, I'd like to correct the record in that while we're not necessarily looking for an investment where the founder can take it from $5 million to 10, we want them to have the DNA of business over self and patient over business. So when you have that real patient experience and that real care, you have likely put that DNA through all of your people and you've promoted the right people in the long run. When you have that and I need to come to you and say, "There is a really good CEO that we want to bring into the business," if you have that right DNA, you're going to say, "Hey, we're partners and we are going to do the right thing for the business." And that is really what we look for more than anything, Geoff. So it's okay for us to make an investment if we feel that the management team may not be the management team or the CEO that has to be there after the first year of investing. We want to have that conversation upfront.

And here's something that I don't believe people talk about a lot where I think a lot of middle market players get it wrong. Healthcare is frequently run by providers and it might be the first time that they've ever run a business of this size and they may be inadequately trained to run a business like this and frankly not exactly know what they're doing. And it's common playbook for private equity to come in and say, "Hey, we'll bring in our management team that we're comfortable with." And that's where I think the first one or two years of investing can go terribly wrong because when you invest at a small company and you've gone at odds potentially with your management team or founders, there's really sometimes just no coming back from that. So it can be horribly detrimental.

We believe in partnering with people that have that passion that really want to put the business and the patient over themselves. That's really, I think, the secret sauce of microcap investing. It is obviously great and it is our goal to invest in companies where that founder can really be the founder at our exit and be our CEO. That is absolutely the goal. But beyond that, you really want to identify people that are going to be good partners, and being a good partner is always doing the right thing for the company and the patient experience.

One of the elements of your thesis in microcap investing is the ability to drive value from EBITDA multiple expansion as you move up the size tree. The last 12 months have seen some level of rationalization of pricing, which translates to reduced purchase and sale prices as an EBITDA multiple. That reduction has not been ratable up and down the size scale. One of the dynamics, it appears to me, is that there's some compression on that expansion. Does that create any headwinds for your model or not? Or is the timelines of those events too hard to predict anyways? How do you think about multiple compression?

Yeah, we think about it a lot. Fortunately, for us in our underwriting, we're always fairly conservative with respect to our mid case. Each investment has a low, mid, and upper case. And our mid case, which is ultimately where we're underwriting to has a lot of conservancy built in. So in that regard, I believe we're a little bit different. We're also looking at very large multiples per [inaudible 00:13:06]. I don't think anything's gotten through investment committee that has a below a five times MOIC with a lot of that conservancy built in.

Now, the reality, to spits some stats at you, is that right now we're at a pretty big spread between, I think, the public markets and the private markets with respect to EBITDA and sales multiples. We've been at a pretty big trough with respect to deal making over the last several quarters. Global M&A volume was down 20 ish percent on Q3 quarter over quarter. Healthcare and US was down a little bit more at 10%. So it is having effect on actually getting deals done. And in certain sectors, as you alluded to, are more pronounced than others. One in particular is around the PPM setting. We're seeing that the price expectations for sellers are a little bit different, I think, than the price expectations for buyers. There's been a number of things, which I'd actually turn the question over to you in a moment, but a lot of the things that are regulatory wise and legally with states beginning to distrust certain PPM acquisitions and a roll up strategies. To potentially wage inflation not really keeping up with any sort of reimbursement upticks.

So we're seeing that sellers haven't really crystallized around some of those facts where buyers certainly have, and the buyer universe has actually even gotten to the LP communities who are investing in funds like ours.So we've actually seen hesitation from LPs about investing in PPM centric funds. So it is absolutely there. I think fortunately for our strategy, we underwrite very conservatively, but I tell you what, right now since we're in the beginning part of investing in our fund, I think there's really no better time to be investing right now. Usually you want to begin investing in markets like these and not be investing where everyone is getting these excellent exit multiples. So we're really excited about where we are in the investing landscape. Of course, we think about and are taking a lot of notice where the exit markets are, but our view is that in three to five years, things begin to normalize again and that it may actually happen sooner. So right now we're at a once in a generational opportunity to make good investments.

Yeah. I'll field the two items that sounded like they were coming back to me on the reimbursement rate not keeping up with wage inflation. I view that specifically meaning like doctors and providers' wage inflation. I view that as more that reimbursement is a ship that turns slowly. So it's not designed, especially with government reimbursement, for it to move around as quickly as wage inflation does, but over time they correlate pretty highly. So that headwind has always felt kind of cyclical/timing related, but one that resolves. The antitrust kind of pressure, which we are following very closely and I'm having lots of conversations with folks about, I think is more interesting in that some of the enforcement desires are not altogether wrong. It's possible for people to accumulate market power and be abusive with it, but mere market power is not in and of itself problematic.

And at the same time, there's a system-wide desire to move the cost curve and the most readily available pathway for moving the cost curve is with more value-based medicine, contracting value-based medicine and ideas. Every one of those require scale. They require very significant investment. The idea that, as a nation or a state, resisting consolidation and scale as the vehicle for controlling costs is exactly backwards, that you've got to have well capitalized platforms of scale before that's even an entertainable idea. That's one that I feel like the headline politics can get ahead of some of the true underlying dynamics.

I was just going to ask you if you felt that that was overblown because we look at this at AMB. It suggests that consolidation is often not really the leader of market prices, and it sounds like you feel the same way.

While it's true that I think that platforms need to take care, that they're not being abusive, but if you play within the boundaries of that, I think you can steer yourself clear of some of those challenges. We do lots of training with platforms, conversations with platforms to identify where their risk frontier is, and it may be their managed care contracting team or something, but sensitizing people to what those risks are so that they behave in a way that takes some pressure off that. It's an area where I think it doesn't feel to me like a trajectory changing risk, but one where some investments and care can really pay dividends in being a well-positioned platform even as you scale.

It's interesting. You also mentioned the growth of value-based care, let's just call it alternative payment models at the moment, but I find it perplexing that it's roughly only 20% of all payments for healthcare in the last year were done through alternative payment models. I think we've all read a little bit of the tea leaves with CMS being a little bit disappointed, if you will, on some of the outcomes with respect to alternative payment models. I'd be curious if you think this is going to accelerate into 2024 with more value-based contracting, or if we somewhat plateaued based on some of the rhetoric from CMS about some of that disappointment I mentioned.

I think it'll be more targeted, and you see this both with CMS and with other more limited value-based contracting with commercial payers is that if you can focus on high acuity, high expense, condition management or disease management, I think those are areas where the return can be a lot higher. Those are also, frankly, the areas where we spend both loads of money. I'm not sure that value-based care solves every problem. There could be limits on the areas where that can be successfully implemented, but in more targeted areas, I think the opportunity is pretty profound.

In particular, when you look at just the wild disparity on a lot of those kind of higher acuity, higher expense disease states, the wild disparity between what we in America spend versus other places in the world without materially better outcomes. And if you're narrow and specific, you can really change the trajectory on aggregate expense with those more targeted approaches.

That's a really good point. But I'd like to note, have you seen what I've done here? I have actually taken this interview over and now I'm interviewing you.

Like I said before the interview, Gordon, I'd appreciate if you'd stay in your lane.

I think it's worth noting that... Going back to value-based care, we've had a pretty good thesis at Frontline that's been really slow to develop as much of this has, but we look at Medicaid spending really being the top expense for most states in the United States. And I'd be curious if you're hearing others, but we think that the Medicaid system needs to shift towards value-based care opportunities in certain markets. And it's another one of the reasons why we like behavioral healthcare because we think that overdose and many other effects of behavioral healthcare become one of the larger expenses for certain Medicaid payers. So we think that there's an opportunity in a bundle payment system or some sort of alternative payment model within Medicaid that we're also very excited about, a key trend within behavioral healthcare people often don't talk about. I don't know if you're hearing the same.

Yeah, for sure. I think that one of the challenges and benefits of our federalism system where you've got these block grants going to states and all of the ideas are not implemented centrally by the federal government, is that there's lots of room for experimentation, and that can take time and can be difficult to navigate, but a lot of very interesting approaches get piloted both in state Medicare programs and also the states from a private payer perspective. So there's lots of room for innovation. It just takes a while.

Yeah, agreed.

Well, Gordon, it's always a ton of fun to chat with you. We've done things together for a long, long time and you're always a ton of fun, but I want to thank you for joining me today.

Thank you, Geoff. Great to see you again. I appreciate everyone having me here, and have a great 2024.

Thank you for joining us on this installment of The Corner Series. 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.