Expected growth in the elderly population and the ensuing demand for more senior-living facilities are drawing venture capitalists to companies that specialize in senior services.
"As the industry heats up, the capital markets in all forms are changing and adapting to meet the demand," said Harvey Singer, research director for the National Investment Conference for the Senior Living and Long Term Care Industries in Annapolis, Md. "Venture capital is an example of a source of funds looking for explosive growth, which has been exhibited in this industry."
Annual revenues for long-term-care companies, including skilled-nursing, assisted-living, rehabilitation and home-care providers, are now running at about $145 billion.
"They serve a large, growing segment of the population," said Scott Meadow, general partner for Sprout Group, the venture capital affiliate of New York-based Donaldson, Lufkin and Jenrette. "There will be growth in terms of the numbers of providers required. It's an attractive market because it encompasses such a range of services and of payer groups."
The U.S. Census Bureau estimates that as the country's 81 million baby boomers age, more than 20% of the population will be over age 65 by 2030, up from almost 13% now.
Merrill Lynch predicts demand for nursing home beds will outstrip supply within 10 years. The $15 billion rehabilitation and the $30 billion home-care industries are expected to grow by a total of 15% over the next decade, while the $12 billion assisted-living sector is projected to grow 30% to 7 million residents by 2005.
In addition to the growing numbers of patients and dollars, Sage Givens, managing partner for San Francisco-based Acacia Venture Partners, said the senior-care industry is appealing to venture capitalists because it's ripe for consolidation and integration and has a high mix of affluent and private-pay patients.
On the downside, Givens said, the risks include an unusual combination of healthcare providers offering medical services and real estate companies offering housing options. A high reliance on government reimbursements subject to public policy changes is another concern, she said. The real estate components of many long-term-care projects require capitalization that may exceed the $30 million limit many venture capitalists set.
Even so, "there are opportunities to start new companies that save money and provide quality care," Givens said.
James Hoover, general partner at Welsh, Carson, Anderson & Stowe in New York, pointed out that venture capitalists have historically provided funding for nursing homes and other more conventional long-term-care providers. But now "there is a scramble among private equity sponsors to find a new target," he said. Assisted living is "hot now," he added, and interest remains high in subacute and rehabilitation companies.
Last week, Hoover's firm invested $25 million out of a total of $56 million in seed money for Mechanicsburg, Pa.-based Select Medical Corp., a privately held rehabilitation services company. Welsh, Carson settled on Select Medical, he said, because of its management team led by Rocco Ortenzio. Ortenzio earlier founded Rehab Hospital Services-which was sold to National Medical Enterprises in 1985-and Continental Medical Systems, which merged with Horizon Healthcare Corp. in 1995. Welsh, Carson had funded those start-ups as well.
"The ideal situation is to back a management team that has been successful before," he said. "We won twice with Rocco, and we wanted to do it again."
Meadow said Sprout Group has sunk $30 million to $35 million in the long-term-care arena over the past year and plans to invest more. He said the firm recently joined with New York-based Eldon Capital to invest $1.5 million each in Security Health Providers, a new Chicago-based company that provides information and discount services to large membership organizations interested in offering their members long-term-care benefits.
Heritage Healthcare, which organizes and manages independent practice associations targeted to the Medicare population, and MatureWell, which coordinates long-term-care benefits and services for seniors, also have received support from Sprout Group, Meadow said.
Since the beginning of the year, a number of other long-term-care companies have received venture capital backing.
In January, a group of venture capital firms put up about $20 million to buy Long Term Care Group, a subsidiary of Minneapolis-based United HealthCare Corp. The firms are now backing the subsidiary as an independent company. Those that have chipped in are New Enterprise Associates; Warburg, Pincus & Co.; Franklin Ventures; and Pacific Ventures.
Also in January, Richmond, Va.-based Manorhouse Retirement Centers sold $22 million of series A preferred stock to an investor group led by Richland Ventures. The assisted-living provider said it plans to use proceeds to finance construction of 12 facilities under development, 10 new projects this year and 12 in 1998.
Last month, Community Rehab Centers in Burlington, Mass., raised $7.8 million in equity from a group of investors, including Dillon Read Venture Capital, Seacoast Capital Partners and Westbury Capital Partners. The company also pulled in another $7 million in subordinated debt from Corestates Enterprise Capital Group and North Atlantic Capital Corp. Community Rehab said it plans to use the money to complete pending acquisitions and acquire new clinics.
Alethea Caldwell, president and chief executive officer of Tucson, Ariz.-based MatureWell, said venture capitalists can be attractive partners.
Caldwell said MatureWell has received more than $6 million from lead investor Sprout Group and other venture capital firms, including Mayfield Fund and New Enterprise Associates. MatureWell, formed in November 1996, has been using the money to develop its network of providers and marketing materials in preparation for its April 1 rollout, she said.
While another large institutional partner, such as a hospital system, might have its own expectations for the company's direction, Caldwell said venture capitalists are more open to new ideas and can bring knowledge about other related industries, such as technology companies.
"Venture capitalists are good partners because they allow you to design something the way it needs to be designed," Caldwell said. "Together you win and are not unduly influenced by somebody else's business."