On this episode of The Capital Corner, McGuireWoods’ Geoff Cockrell discusses investing in the small to mid-sized healthcare market with Seven Hills Capital’s founding partner Matt Pettit. 

As the leader of a firm focused on first round institutional capital investment opportunities, Matt also comes to his position with experience as the CEO of dermatology practice management company, Ascend Dermatology. His background means that he’s sat on both sides of the healthcare services table and has lived the daily experiences of the CEOs his investment group supports. 

But investing in small to medium-sized companies requires a much different approach than those used by larger scale equity firms. Instead of using traditional networking events, such as those hosted by the Association for Corporate Growth (ACG), Matt and his team focus on forming personal relationships with potential partners and will even enact letter-writing campaigns as part of their process. 

Matt discusses the unique experiences that come with investing in the low to middle market and shares how his company serves as a strategic partner — not just a funding source. By offering business development assistance and access to capital markets, Seven Hills supports its portfolio companies in creating long-lasting businesses with its operator-centric approach.

Meet Your Host

Name: Geoffrey Cockrell

What he does: Geoff is the Chair of McGuireWoods’ private equity group and serves on the firm's Board of Partners; he has extensive experience in mergers and acquisitions, especially in the healthcare space.

Organization: McGuireWoods

Connect: LinkedIn

Featured Guest

Name: Matthew Pettit 

What he does: Matt is the founding partner at Seven Hills Capital. Seven Hills is a long-term partner for management teams seeking to drive growth, change, and improved outcomes in healthcare services. Matt currently serves on the board of directors of the VersiCare Group and Reliable Medical supply company. 

Organization: Seven Hills Capital 

Connect: LinkedIn

Notes From the Capital Corner 

Top takeaways from this episode

★   Small to mid-sized healthcare businesses need more than just capital. That’s why Seven Hills is committed to forming meaningful relationships with its portfolio companies and offering support beyond money in the bank.

★   Successful integration requires exceptional communication. When a new partnership is formed, the transition is a fragile process that requires careful planning. Existing management and new management need to feel supported and prepared to navigate coming changes. Transparency and a detailed playbook help everyone involved feel comfortable. 

★   Investors need to know their limits. Understanding your firm’s capacity is vital to ensure smart investment decisions. Bringing in entirely new platforms versus add-on acquisitions require different time commitments and use of resources. Know how much your team can handle and include your current capacity as part of the conversation when seeking new investment opportunities. 

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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, and 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.

Today I'm joined by my good friend, Matt Pettit, the founder of Seven Hills Capital. I've done a number of really fun deals with Matt over the years. He's one of the best investors I know. This will be an interesting conversation. Matt, for those who don't know you, can you introduce yourself and tell us a little bit about Seven Hills?

Of course, Geoff. And I don't think I've heard people say the nice things about me before, so I appreciate it, but Seven Hills has now been around, we're surprisingly going into our sixth year of operating and our sixth year being advised by Geoff and it's been a real pleasure to grow the firm alongside McGuireWoods. But at Seven Hills we're focused on building a portfolio of leading healthcare services businesses.

Today we have two in our portfolio. Our goal is by the end of 2022 to have four. We are definitely on the smaller side. We do seek control investments alongside operators and entrepreneurs who are looking to either grow their business inorganically or organically, and oftentimes involve a family selling shareholder.

We don't typically buy from institutions. We like to be the first round of institutional capital. And as we think about our value creation, it's really by adding three pillars to each company. One, which I'm sure I'll talk about today, is business development. Two is really back office financial support, and three is access to the capital markets. That is, smaller privately held business previously that they didn't have, or that'd be on the debt or even potentially sometimes the larger equity side.

Matt, let's talk a little bit about the development aspect of it. As you know, the lower middle market, especially the founder portion of it with no institutional investors already connected to a company. It's a wide and disorganized market. How do you go about finding value in that vast market?

When we look at the market, it's definitely a labor of love that over the years, we found some efforts bear fruit, some don't. If I think back to when this all started, when I left the larger institution 10 years ago, my wife and I sat at our kitchen table and wrote letters to every dermatologist in the Midwest until somebody responded. We could build a platform around that, which we never really did, but we've taken that approach to build Versicare Group, Reliable, and our future platform. So to do that, we don't spend as much time as some of our brethren at the ACG events or the deal networking events. We try and spend a lot of time in our local community. If that's writing healthcare leaders letters, getting in front of the right companies, and then doing a lot of direct outreach, which in our firm has grown. Sam, who's on our team, and I were doing most of that and we kind of hit a wall.

So recently we've actually brought on a director of business development partnerships. And with that role, Ben is actually reaching out on behalf of our portfolio companies, but also on behalf of the firm in an effort to avoid auction situations and find proprietary opportunities, which come with a lot of excitement at first and sometimes failure. But sometimes we come out of nowhere and be really exciting and that's why we like to focus our efforts below the radar, knowing that oftentimes it could be more work to execute the transactions, but we believe it's worth the longer time.

Two questions following up on that, what's the life cycle of that pursuit? Is it a longer term relationship building, or is it just lifting up rock after lifting up rock after lifting up rock? And the second question is, what's your pitch to them? On the first encounter, what are you selling? Is it just relationship or are you selling a deal? Or expertise? How do you go about that?

For an add-on perspective, if I look at the last three we've closed, which are all recently, we had been in contact with two out of those three for over a year and a half. Both of them were proprietary opportunities that we met the seller, either at an industry conference, or through a letter writing campaign, or through cold calling and built relationships as they explored various options. We're obviously in anything, not the only strategic buyer out there. So it's really important for us to identify who and what we are early, which given the size of our companies is sometimes an alternative to some of our larger competitors. But also it is something where if they do want to roll stock and come to the platform, especially as relates to Versicare, we're very upfront with them that it's a longer investment cycle, which is appealing to them.

But on the platform side, we look at it as saying if we touch a proprietary opportunity, hopefully in two years we have a real opportunity to invest in that company, whether they have hired an advisor or not, and we've seen it go both ways. When we initially meet them, we're very upfront about what we believe our value creation is, which is the three pillars I talked about before, the finance, the BD, as well as the back office support. But the other thing that we're very upfront is, I consider myself a CEO who was much better at doing other things. So having sat in that seat, I think I can uniquely talk to a lot of these smaller companies and say, look, I've run an 150 person operation. I've had to meet payroll. I've had to walk somebody out of billing. I've had to do the things that some investors they talk to have heard about and may have been tangential to, but haven't actually sat in that seat. And we've found that's been a real tie breaker for us over the years.

When you're looking at companies, given that you often start the platform with very small and just build from there, when you're looking at targets, and from the perspective of, this target could be a platform into itself versus this target really needs to be folded into an existing platform. What are the differentiators on that? Are they qualitative as to the founder's skillset? Is it just the fact that you either do or don't have a platform in that space? But are there qualitative differences at the small end of the market of something that could be the anchor of a platform versus just having to be an add-on?

What I would say, it's all about the people. I've seen small businesses I thought could be a great platform because they had, let's say Sage Intacct instead of QuickBooks or did this, that, and this, and then you really dig in, but while they might have the systems, they don't have the people. Maybe tech companies that I'm not smart enough to invest in can do that. But especially healthcare services to us, it's truly about the individuals. A good example, that was Versicare. Geoff, when we first advised on that, I mean, the business was barely making a million and a half dollars a month and it's grown exponentially, gone from just Michigan to, we'll be in eight states by the end of this month. And the way we did that was building a business around Lauren Sclesky and later Renea Sageser who runs APT.

People who had an unbelievable command of their business, their strategy, but also their team. And what they were able to do is move their teammates into the right roles as the platform evolved, knowing when it was the right time to hire and knowing when it was the right time to unfortunately make demotions and other tough decisions. That, the more we look at these, becomes our ultimate investment decision. Is this somebody who can strategically build the platform alongside of us and the systems and the scale will follow. But if you don't have that key ingredient, it's very challenging for us.

When you look at folding in add-on acquisitions, I'm always struck with the complexity and sometimes success, sometimes failure of integration. How do you think about integrating a series of small acquisitions?

Going back to, I wasn't a great CEO because sometimes, and you know me well enough to know, I can chase the squirrel and not stay focused. And that is the key in my mind to a great integration, is a very detailed playbook, a very open and honest understanding with the sellers, the new management team, the existing management team, on roles and responsibilities, and just transparency. If one side's feeling like it's not going well, they should be open and honest about that.

Out of the last five or six integrations we've done, I'd say that every one has its own learning experience. Has any of them gone flawless? Absolutely not. But the ones that have gone better than others are when the selling company really formed a deep relationship with our integration team and there weren't real surprises. There's obviously surprises but they rolled with the punches versus when you don't have that chance to meet the team on the front end and there's a lack of communication, closing day and integration day feels like more of a surprise and a shock with some resentment, some anger, than some excitement about the future.

Given your success in some of these add-on acquisitions, when you chart out the path forward, there's different approaches that I've seen folks take. One is to, as quickly as they can, start scaling up the size of their add-on acquisitions, others as quickly as they can don't scale up the size, they scale up the speed. How do you think about that choice?

It's a debate that we have in every single one of our board rooms. And it's a tough one because if you look at two of the matters you're advising us on right now, one is pretty big, one is really small. For our integration team the work won't be that different and that's hard because the price is materially different. Well with some of these acquisitions, you can get for one or two times, or sometimes even the value of the AR, it takes a long time to do those and you're capacity constrained with your team on how many you can do. Same with the big ones. If you do one really big one, it can be a big time suck. So what we've decided our view of it is, every year our company can complete X acquisitions and we meet biweekly with our CEOs to walk through the pipeline and make that size versus volume decision. Knowing that our yearly volume is probably realistically capped, if we want to continue to do a good job.

Well, Matt, we want to thank you for spending a few minutes with us. It's been fun watching you build these really fabulous companies and looking forward to many more down the line.

Awesome. Geoff, I appreciate it. It's always great to spend time together and looking forward to more in the future.

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.