How does a thesis-driven private equity firm develop its focus areas and decide which sectors will be most valuable? How do firm leaders identify sectors that will be good for the industry, but also successful investments?

We bring in one exceptional investor, Pete Tedesco of Health Enterprise Partners (HEP), to explain how thesis-driven investing works at his firm. 

Pete says it’s all about understanding the current industry climate. And in the coming years, he is expecting a big shift toward value-based care and away from fee-for-service reimbursement. With healthcare technologies as part of HEC’s thesis, Pete says the firm has begun to focus on investing in technologies and services that can best help providers make that transition.

“We're trying to think about it as, how do we help enable the next generation of providers across various specialties to succeed in value-based care models?”

In this episode of The Capital Corner, we also discuss the post-pandemic demands within the healthcare industry and the growing interest in investment of niche healthcare sectors.

Featured Guest

Name: Pete Tedesco

What he does: Pete Tedesco is a Managing Partner at Health Enterprise Partners, a lower-middle market private equity firm focused on healthcare. Pete was previously a Vice President at Olympus Partners, where he evaluated and executed leveraged buyout and growth equity transactions and served on the board of directors for companies in a range of industries. He is currently a board member of MD Alliance and Aware Recovery Care.

Organization: Health Enterprise Partners

Connect: LinkedIn

Notes From The Capital Corner

Top takeaways from this episode

★     Health solutions to post-pandemic issues are important to pursue. One of the biggest challenges facing healthcare providers right now is staffing shortages, resulting in higher labor costs. One opportunity HEP is pursuing to improve outcomes for providers, Pete says, is investment in administrative automation technologies, which can help cut operational costs. 

★     Stay ahead of the curve. HEP’s thesis-based investing is all about paying attention to the industry’s needs and the areas that may have disproportionate demand. Behavioral health, women’s health, and especially the technologies providers need to transition to value-based care, have all been sectors at the forefront for HEP. “We're trying to think about it as, how do we help enable the next generation of providers across various specialties to succeed in value-based care models?” Pete says.

★     The future is value-based care. Many providers are preparing for — or have already shifted to — value-based care, Pete says. When considering investments in value-based care models, Pete says considering geographic density is still important. “But then it's also being able to create a partnership with the local payers and being able to create value-based care models that will work and will allow the business to succeed in that given market,” he explains. 

Contact

Connect with us on Facebook, Twitter, Instagram, YouTube.

Subscribe to The Capital Corner in your preferred podcast app so that you never miss an episode. 

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.

This is Geoff Cockrell, partner at McGuireWoods. And thank you for joining another episode of our Corner series, where we dive into narrower topics and industry focuses in a short format with some of the leading industry participants and deal makers in healthcare investing. Today, I'm thrilled to be joined by my good friend, Pete Tedesco. Pete is a managing partner at Health Enterprise Partners. And Pete really brings a combination that is in my mind, a rare combination of skills. Pete brings a very intense intellectual understanding of healthcare investing, but also brings an amazing array of soft skills that enable him to navigate complicated sale processes with oftentimes difficult sellers in a way that lets us both get there smoothly and get there at all. So, Pete, thanks for joining us. Can you tell us a little bit about HEP and yourself and then we'll jump into some topics.

Absolutely. Thank you for that kind intro, Geoff. Thanks for having me and great to be here with you. So as mentioned Pete Tedesco, managing partner with Health Enterprise Partners. We are a lower middle market, private equity firm focused entirely on healthcare. And then within healthcare we specialize in healthcare services and healthcare technology investments. The kind of unique part of our firm is that across the three funds we've raised to date an addition to capital from financial investors, we've raised capital from healthcare industry constituents. So we have 19 hospital systems and 17 health plans that are limited partners in our funds. And we try to leverage those relationships to help direct our thesis driven sourcing activities as well as help vet and then grow the companies that we ultimately invest in.

Thanks, Pete. I'm always interested to hear kind of how thesis are developed and healthcare is a massive world. It's sixth of our economy, a lot of different places to focus, but where are some areas that you are developing your thinking around and let's delve a little bit into what your kind of thought process is on why those sectors?

Sure. I'm happy to do so. As I mentioned, we tend to be pretty thesis driven. We're a small investment team. And so we can't chase a lot of different opportunities if we're not already in a place where we have a lot of conviction around space and sector, and a lot of knowledge of what the success drivers are in that space. So one of the things that we do to help identify those thesis areas is consistently survey our payer and provider limited partners on what issues are keeping them up at night, and then try to go find companies that map back to that. One that is far and away, the largest priority or pain point for both providers of care, as well as health plans and other constituents is the current labor shortage as well as pressure on operating margins.

And those are tied together because the labor shortage is resulting in increasing costs for the labor, but not being able to find qualified individuals, particularly clinical folks is a really big problem as well. And so as we did a survey towards the end of 2021, we saw that reducing costs through administrative automation was probably the number one priority across the healthcare landscape. And what do I mean by that? I mean that there are ways to improve hospital health plan operating margins by shifting administrative tasks from previously manual or paper based processes to electronic or automated processes. And these can help in myriad ways. But the focus really is on being able to address the labor shortage, get more work out of the same staff, improve the margin opportunity for providers, address physician and employee burnout, and improve access and the patient experience. So what I think started from frankly, a necessity to combat increasing labor costs and shortage of labor actually has the opportunity to then help providers and payers go on the offensive to both improve outcomes and improve access and patient experience by adopting these administrative automation technologies.

That's interesting. So with that thesis in hand, how do you go about scouring the marketplace looking for a target? Is it kind of best in class? Are you looking for a foothold? Are you looking principally for a person that you think can take a company to another level? How do you think about that? Or is it all of those?

I was going to say, why can't it be all the above Geoff? So no, what we will typically do is put together what we call a sector roadmap, where we are segmenting a given thesis area on a number of different attributes. Within administrative automation, you might segment it based on provider focus tools, payer focused tools, and patient focused tools.

We will then run through our own research, determining companies that we know or discover in each of those sectors and working to speak with them, perhaps not even as a potential investment opportunity directly, but more as a way to gain additional knowledge in the space. We will pursue those as well, to your point on executives with folks in our executive partner network or our broader network of operators who will both have a skillset and typically an ability to operate within that industry, but also a network of their own companies and contacts that can be additive to our work in that space. And then of course, we're also reactive to things that do come in over the transom, but again, our work in developing these thesis areas and understanding the drivers of success and the different players and business models allows us to move more quickly with conviction around those opportunities when they do come in.

Do you find that when you move into areas that don't have the same kind of direct governmental reimbursement like, so provider services that it opens up the type of competitive buyers that you're competing against and how does that impact pricing? So how do you think about that dynamic?

Geoff, the old answer to that question, I think would have been, yes. It probably still is. However, what I would say is we've seen for better or worse, those broader organizations being interested in dipping a toe into more heavily regulated government reimbursement, very nichey healthcare segments. And I think it possibly goes back to, I think, where you started this conversation, which is just frankly, the size of the healthcare market. Particularly when we look at technology type tools, broader tech investors, shifting a focus to make sure that they have some exposure to the healthcare market. Same thing with services, investors saying, Hey, I want exposure to healthcare and not being scared away by some of the more managed or more reimbursement heavy solutions out in the market. It will be curious, or it will be interesting to see how that plays out over time. I would like to think that there's some benefit to those of us that spend our entire lives in this industry. But that said, we do have a lot of issues that need to be addressed in the healthcare market. And there are room for a lot of different winners.

Yeah. I come across private equity investors that are not really healthcare investors all the time that are doing exactly what you said and kind of dipping their toe in. And I had a conversation just a week or so ago with someone who's looking at a healthcare deal. And they said, well, it's probably not like super regulated. It's a kind of turnkey solution for a pathology lab. And I'm like, oh, my word, you're just diving in head first into deep, deep water. But definitely participants who have not historically been healthcare investors are dipping into that space sometimes with full awareness of the risk that they're walking into sometimes not, but that market will keep getting more crowded.

That's why they need a highly qualified, healthcare attorney.

Exactly, exactly. Right on cue.

That's why they call you.

Thanks Pete.

Right, right.

Yeah. Maybe spending a little time on kind of provider services that's also a wide market of sectors, which areas have you developed a thesis around in services?

Well, we've got a number of thesis areas that we're pursuing there right now. One area we've been extraordinarily active in as a firm historically is behavioral health, really chasing the tailwinds in increasing access to care, increasing interest in receiving care. And then what is still a huge supply demand imbalance in the US really, across all levels of acuity and behavioral health, everything from general therapy, all the way through more serious addiction treatments and serious mental illnesses. We've got a number of portfolio companies in that space and prior investments. Another one that we've been investing in heavily is women's health and increasing access to high quality care for women.

And then a solution or a sector that we've been investing behind gosh, for going on a decade, over a decade now and the industry has been talking about as long as I've been in healthcare investing, value-based care. But we're thinking about it in a slightly different way I think today than perhaps we used to and the industry used to. And the way we think about it today is that value based care is really becoming a piece of every provider's business model. There's not barring a couple of industries, an ability to ignore generating results that are positive from a value perspective and an outcome perspective, measuring that, and quantifying that, and being able to report on that.

And so, as we think about where we want to invest, our provider businesses all perhaps succeed under fee for service models, but know that they are taking steps toward succeeding or already have a business model that succeeds under value-based care. And then we're also spending a lot of time looking at both technology and services that will help provide our organizations, make that transition to value-based care models. So that could be assisting with payer contracting, workflow management along the care delivery spectrum, protection from downside risk, and even technology tools that will help predict success or lack thereof under alternative payment models or value-based care models. So it's an area where there's a lot of activity, but we're trying to think about it as how do we help enable the next generation of provider across various different specialties, succeed in value-based care models.

Kind of provider adjacent. Yeah, we see a lot of that, data analytics and other things that are components of how a provider business needs to evolve, if they're not going to lose their shirt in value based contracting because risk based contracting means exactly that. And so all of the aspects around that. And then on the provider side in my world, that's one of the more interesting dynamics, is you have folks getting to a certain scale beyond just kind of primary care, might be orthopedic or other areas where you get to a certain scale and then you can all of a sudden start doing value based contracting with payers in a market in ways that are super disruptive to that market. I think we're going to see a lot of evolution of what kind of the consolidating scale of some of these practices, what they are able to do that non-scale practices are not able to do. And it'll start kind of shaking up those markets in super interesting ways. But I think we're in the early innings of that evolution, but it should be both a fun and bumpy ride all the way.

That's right. And that certainly informs the way we view provider healthcare services investments, right, is that geographic density is quite important because it used to be for just having better negotiating power with the local payers by driving greater volume and density in a geographic area. That's still the case, but then it's also being able to partner with the local payers and being able to create value-based care models that will work and will allow the business to succeed in that given market. So it's always been important to have geographic density, as we think about some of the buy-in builds we do around provider organizations, but that is of increasing importance, given value-based care trends.

Right. Even just on the defensive side of it, if you're going to be able to compete in a market where that starts happening, I think you're exactly right. That density and scale in a particular geography is necessary to both exploit those and defend against others that are exploiting, but that'll continue to evolve.

That's right.

Well, Pete we'll call it there for today. It's always fun to talk with you. Like I said, you're one of the best healthcare investors I know. Thank you for spending a few minutes with us today.

Absolutely. My pleasure. Really appreciate it. Enjoyed the conversation.

Thank you for joining us on this installment of The Capital 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.