On this episode of The Banker's Corner, McGuireWoods' Geoff Cockrell chats with Larry Barr, Partner at Middle Branch Partners, to discuss the buy side of private equity transactions, particularly in the healthcare industry. 

Investors looking for buy-side representation benefit from working with firms that have in-depth knowledge of the specific segment they are interested in and with partners who have long-standing relationships in that area. For buyers looking to validate their purchase hypothesis, working with a knowledgeable firm and advisory board can provide operational insights and relationship connections needed to validate a potential deal. 

Larry also shares his take on some of the drivers bringing private equity investment into the MedTech space. Despite uncertain waters due to macroeconomic dynamics and uncertainty around credit availability, Larry remains bullish on MedTech. 

“I'm one of those that's a perennial bull,” Larry explains, “As I like to say, I couldn't do what I do for a living if I wasn't an optimist.” He cites the recent MedTech deal, coming in at just under $200 million, as proof that there are good transactions in the market and people are going to find a way to close them. 

Featured Guest

Name: Larry Barr

What he does: Larry has been instrumental in building key strategic relationships between businesses in MedTech that have provided owners and investors with opportunities for growth and liquidity. Based on his prior experience, he understands the need to take a relationship based approach to achieve desirable outcomes for his clients. This has included M&A activities in various markets including respiratory, orthopedic, interventional, medical equipment, and other devices across diverse geographies including Asia, Europe, and Israel.  Prior to this, he served as CFO in middle market firms and in lower middle market leading at MB Financial Bank, Fifth Third, and The Bank of Montreal.

Organization: Middle Branch Partners

Connect: LinkedIn

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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.

Thank you for joining another episode of the Corner Series. I'm your host, Geoff Cockrell, from McGuireWoods. On the Corner Series, we bring together deal makers and thought leaders surrounding private equity investing in healthcare and healthcare related businesses. And we talk about some of the drivers in deal dynamics of those sorts of transactions.

I'm thrilled today to be joined by my good friend Larry Barr, from Middle Branch Partners. Larry is one of the best investment bankers I know, and Larry's got a little different angle, is often working on the buy side of those transactions as opposed to representing sellers exclusively in sell side transactions. But to get us started, Larry, maybe introduce yourself for a second and Middle Branch Partner.

Thank you Geoff, for having me on the podcast. It's a pleasure to join you. Middle Branch Partners, we think of ourselves as a small boutique M&A advisory firm. We actually steer clear of investment bank just because people think of money management services and that's not what we provide. We've been in business now for just about four years. It's myself and two partners, one here in Chicago with me by the name of Chuck Weikel, and then another point of differentiation for us is that our third partner is based in Sweden.

Despite the fact that we're a small firm, we get involved in a lot of cross-border opportunities, whether that's European entities looking to do transactions here in the United States or US entities looking to do transactions in Europe. And I specifically say Europe because that's really, US and Europe is where we spend our time. We don't really do much in Asia.

As Geoff said, we do both buy side and sell side. Our buy side work is predominantly focused on supporting private equity firms, sometimes in their efforts to secure a platform in the healthcare sector. Other times, and more frequently, we're supporting one of their portfolio companies in an effort to do add-on acquisitions. We also do sell side work. Our sell side work is really quite the opposite. We're predominantly working with traditional lower end of the middle market companies, say five to 50 million in revenues, and these are generally closely held, privately held businesses. Whether it's the founder of the company or a descendant of the founder of the company.

We'd love for our buy side clients to hire us to do the sell side after we've helped them grow, but they tend to move to some of the other larger firms in the space.

So Larry, often a private equity fund or sometimes within a platform, they'll have a business development function and part of that function is out there trying to chase down new add-on opportunities. How would you articulate Middle Branch's value proposition against platform or private equity firm that would want to do that all in-house?

Sure. Our value proposition is we've been extremely focused on the MedTech manufacturing sector in particular. We really cut our teeth in that sector about 15 years ago or so, really focused on orthopedic contract manufacturing. And then as we did a number of transactions in that sector and that led to the interventional sectors, whether it's cardio or other surgical procedures. So that went from metals to plastics.

And so I think the fact that we've been so focused on that sector for the last 15 years, we've really been able to develop a wide network of people that we know in the industry. And even though we consider it to be a wide network, it's a very deep network as well. Whereas, the business development guy for a private equity firm, he's that mile wide, inch deep. I'd say we're probably more a quarter of a mile wide, but a mile deep with our relationships.

A perfect example would be a transaction that we recently closed. We were engaged by a company called Acrotec, they're based in Switzerland. They're about 450 to 500 million in revenues and they're a portfolio company of the Carlisle group, very acquisitive. They've done 25, 26 deals all really in Europe, predominantly in Switzerland and France. And really wanted to get some roots down here in North America.

So it was a great story just because of, again, being so focused on the sector, a relationship that I had, made an introduction to a gentleman who's on the board of Acrotec who then put me directly in contact with Acrotec and probably within two months of introduction, we were engaged to five prospects and targets here in North America. The company that we ended up acquiring, which the deal closed just before Christmastime, was a company I've known for 10 plus years and had developed a great relationship with the business owner.

So when I approached him with someone that I thought would be a good fit for his business, there was a lot of trust already built up that I was bringing him something real that would be of value to him. So literally we were engaged by the client in the middle of June and under LOI by the end of September and were able to close the transaction, again just before Christmas and actually cash closed at the end of January, but the signing was in 2022.

I'd like to say that all transactions run that quickly and that smoothly, but unfortunately they don't. But I don't think a private equity beating the guy out of Carlisle would that kind of relationship that I had with the business owner to be able to move things along that quickly.

One way to think about buy side representation is segmenting the market that you're looking at, and tell me if this is constructive. That at one level there might be smaller targets that are not in a process that are hard to find, where I would think that your presence in specific markets could help. There could be larger targets that are pre-processed, so fishing upstream a bit or also positioning within a sale process. Do you work in all three of those or just mostly the first two? How do you think about that?

No, I think that's a great way to look at it. And I think first off, the way we start a process is we really want to work with our client to develop a really firm hypothesis about the project, because then we can take that hypothesis and search through our own database, which has... Oh, I don't know, I think about 16,000 names in it by now, and also resource other external databases that are available to really pull together a very highly targeted list.

And again, often on that list, we know many of the businesses and the business owners and we haven't been to all their businesses, but we've visited a lot of them. So that's the start and we really try to really filter the list from a value perspective, "Who is most valued by the client that they would like to do a transaction with?" And also we try to filter for, "Okay, who can we get into more readily to engage in a conversation?"

The smaller companies that are under the radar and are pre-processed, those are often easier to get into. Our focus is to try to avoid a target company deciding to go into a process. In general, our client is going to be on their target list, so they don't need us for that activity. Our value is resourcing those companies on the target list.

And what we do to support our activities is we've recruited a really active advisory board and these are individuals that have held senior positions at medical device companies during their careers and for the most part are now retired. And so they bring knowledge from just an operations perspective as well as the ability to reach out to folks that we may not have relationships with.

A couple of examples are Gary Henley, who was president and CEO of Wright Medical, which was a large independent OEM, it's now part of Stryker, he's on our advisory board. A gentleman named Tim Kelleher who ran the OEM division of Teleflex, which was Teleflex's internal contract manufacturing company. It was about a 250 million revenue size business inside the two plus billion cardiovascular company, Teleflex.

Larry, when you're working with a platform, is your work with that platform attached to them over an extended period of time where you're doing an acquisition program for them or does it tend to be a little bit more episodic?

That's why we like buy side work, Geoff, because it tends to keep going. So Acrotec for example, we closed that transaction. We're flying out today to go meet another target on their behalf. We had closed a transaction earlier in 2022 for another client, a small publicly traded company called UFP Technologies, and that acquisition was actually a company based in Galway, Ireland that also had operations in Costa Rica. And we continue to work for work for FP. It's one of the reasons we like the buy side. We love sell side, but sell side, once you're done, you're done.

I'm an M&A lawyer and I like buy side for the same reasons. We're the same. Maybe pivoting a tiny bit given your deep presence in MedTech manufacturing, maybe talk about that sector a little bit. What are some of the drivers that are bringing private equity investment more heavily into that? We're definitely seeing it and I have some thoughts, but I'd love to hear yours.

Sure. I think one of the things that's always made that sector very attractive to private equity is, number one, the large OEMs in the space, whether they're orthopedic or cardiovascular, have really been pushing out manufacturing to suppliers and allowing them to focus on what they do best, which is developing products and taking those products to market and selling them. They often will continue to do their own manufacturing, but the more complex products are often pushed out to contract manufacturers. So the contract manufacturing has really grown faster than the OEM because of this down streaming of the manufacturing.

The other thing that makes it attractive to private equity is it allows them to participate in a very large sector of the economy, healthcare, without taking direct reimbursement risk on the device and regulatory risk on the device. That being said, manufacturers are, for the most part, are FDA regulated and usually have at least an ISO13485 registration, but still you don't have that same direct risk of product failure.

I would add to that there are a lot of pure healthcare investors that have some increasing anxiety about the degree to which they've invested in provider services. Most of them are still pretty bullish on the sector, but they've made a lot of investments into provider services. And so expanding out into other segments of healthcare investing, whether that is different sorts of healthcare services, pharma services, pharmacy services or MedTech manufacturing or other healthcare IT.

There's a lot of press to, like you said, move either trying to avoid some of the direct reimbursement risk or just raw diversification away from as heavily investing in provider services. So we're definitely seeing a lot of activity. And then as you noted, the lack of direct reimbursement, which you need to really know what you're doing if you're going to be investing in that. It can be a little daunting, but folks that are wanting healthcare exposure without that, there's a lot of interest in some of these related healthcare types of fields.

Yes, I agree. And it's interesting, there's been a significant amount of consolidation in the manufacturing sector. But it's amazing just how fragmented it still remains and there are lots of opportunities in particular to do a buy and build strategy around certain sectors. Especially if someone's willing to maybe start a little smaller than they typically would from a platform perspective.

There's also some scalability that some of the provider sectors can present challenges. If you have a billion and a half value MedTech manufacturing company, you can see pathways to continue to grow and scale if you have a billion and a half dental platform. You have to think a little bit more clearly about what the backend scenarios are, who are the buyers? There's some readily available scalability in MedTech manufacturing as well, which is pretty attractive.

Yes, I agree. I agree wholeheartedly. It's interesting, and I don't know that much about the transaction, but I noted, I saw just earlier this morning that 3i, which has a holding called Q Holdings sold off a part of their manufacturing to a company called Sertec, which has really become a leader in active and plantables manufacturing.

And so I think you're seeing now opportunities to where some of these companies have been built up and have a lot of different capabilities, they're maybe looking at, "Okay, where do I really want to focus my firm in divesting parts that maybe while they're strong don't make sense in terms of the direction the company wants to head?"

As I've been having these conversations, while we collectively are heading into some more uncertain waters from macroeconomic dynamics or credit availability, whenever I'm speaking with someone that's an active participant in the market, I always want to get their perspective on nearer term and longer term prospects in the M&A world. Given that you have a pretty zeroed in focus in a particular sector, how bullish or bearish are you for the next three months, nine months, 12 months looking forward?

I'm one of those that's a perennial bull, Geoff. As I like to say, "I couldn't do what I do for a living if I wasn't an optimist." And I think having this 3i transaction, which was just shy of about a 200 million dollar deal getting done in today's environment, I think speaks to the fact that certainly good transactions are out there and people are going to find a way to get them closed.

This is on the sell side, but I've counseled some of my sell side clients right now that that's a little quieter out there and now might be a good time to at least dip your toe in the water to see how the market responds from a valuation perspective and make a judgment from there. And because you'll be able to do it with a little less noise and other transactions that people may get distracted by.

So you're overall positive, looking forward, that's encouraging. I'm an M&A lawyer, so I naturally see the world in terms of risk, which makes me naturally bearish so we can temper each other out a little bit and get a clear eye view of the future.

I think what you're going to maybe see is deals getting done with a little more structure. In the past, people were putting up to five times of leverage onto a deal, maybe now it's four, four and a half. But as I said, I think there's lots of good opportunities out there, and from a private equity perspective, they've got money that they want to deploy. There are debt funds out there that also want to deploy their capital into transactions. So I think people will find a way. And we have to get used to the fact that we're now operating in a normalized interest rate environment, which is obviously different than what we've been in for the last... What? 10, 15 years.

Goldilocks for fun. But the more regular cost of capital has implications on pricing, and I think the seller universe will rationalize a little bit and adjust some pricing expectations over time, but that'll probably take a little bit.

I think that will take a little bit. We've seen obviously on multiples expanding over the last couple of years, some deals have gotten done at some pretty extraordinary multiples. And I've often talked to sellers and they say, "Well, if my EBITDA will be 2 million higher, so if the multiple is one turn less, I'm still making a lot of money." And I've always said to them, "I want to hear you say that when someone actually comes to you a year later and says, "Well, now we'll only pay you 10. When a year ago we would've paid you 11 for your business that's now even stronger than it was." So I think you're right. Seller's, it might take a little time for them to adjust their expectations.

Well, Larry, I try to keep these podcast to about 20 minutes, so this has been a ton of fun. It's great to hear your perspectives and your positioning in the market. Thanks for spending a few minutes with me.

Oh, thank you for having me. And look forward to future opportunities.

And I'll see everyone on the next episode.

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