When it comes to healthcare companies banking on the cutting edge-gene therapy, stem cells-Russell Carson says you can have 'em. Carson and his partners will invest their clients' $12 billion elsewhere.
Don't get Carson wrong. His private equity firm, Welsh, Carson, Anderson & Stowe, likes healthcare, just not technology-or research-based start-ups. There's too much new science and too much government regulation involved to make smart investments, Carson says.
But healthcare services rely on good management for success, and they post easy-to-comprehend financial results, both of which are easier for Welsh, Carson to monitor, Carson says. And the investments can be on a bigger scale.
"We currently are working with a $4 billion (healthcare) fund," Carson says. "We're not in the business of doing small things. We're in the business of doing large things."
Large things such as making investments of $100 million to $500 million to take majority stakes in privately held healthcare services companies that hope to go public.
Large things such as backing the former Quorum Health Group, Brentwood, Tenn., in 1989. Quorum grew to be the largest hospital-management provider, with more than 200 contracts, and the owner of 21 hospitals before it was bought by Triad Hospitals, Dallas, last year for $2.4 billion.
Large things such as Welsh, Carson's $145 million investment that began the transformation of Behavioral Health Corp. into Ardent Health Services, Nashville. Ardent is making a big push on the acute-care services side of the business with its pending purchase of three-hospital Carraway Methodist Health Systems, a not-for-profit system based in Birmingham, Ala. (Jan. 14, p. 4). Carson, 58, sees large things ahead for the company run by David Vandewater, the former No. 2 at the old Columbia/HCA.
"I'm very, very high on (Ardent). We have a world-class manager with David Vandewater," Carson says. "I'd be disappointed if we didn't have a multibillion-dollar company within five years, and David is certainly capable of managing such an enterprise."
Making a name
Most observers think Welsh, Carson brings to Ardent an impressive history of investing in healthcare providers over the past two decades.
"Welsh, Carson has really been involved with healthcare a lot of times when it wasn't in the favor that it is today," says Matthew Gallivan, president of the Nashville Health Care Council, whose members include most of the investor-owned hospital chains based in the area. "That means they got in at the right time and with the right opportunities."
Welsh, Carson was founded in New York in 1979, and today the firm manages $12 billion for investors, about one-third of it invested in healthcare; the rest is invested in communications and information services. The firm employs 25 professionals, and five of them, including Carson, focus on healthcare.
In 1982, the firm made its first healthcare services investment with Rehab Hospital Services, started by Rocky Ortenzio.
Ortenzio says he had tried to take Rehab Hospital Services public, but there wasn't enough market interest. Ortenzio met Carson through an acquaintance, and a few months after Welsh, Carson invested, public investors were ready. Rehab Hospital Services went public in late 1982, and by 1985 it was sold to National Medical Enterprises, a forerunner of Tenet Healthcare Corp., Santa Barbara, Calif.
"That (success) was really the lightning rod, and the relationship has continued ever since," Ortenzio says.
With backing again from Welsh, Carson, Ortenzio and his son Robert later started Continental Medical Systems, a rehabilitation hospital provider that was purchased by Horizon Healthcare, Albuquerque, in 1995. Welsh, Carson also invested in Select Medical Corp., for which Rocky is chairman and Robert is chief executive officer. The firm put up $25 million of the initial capital of $56 million in Select, which is based in Mechanicsburg, Pa., as Continental was.
"When we started new companies, we didn't do a check of a bunch of others that might have wanted to be involved," Rocky Ortenzio says. "I just sat down with Russ, and that was it."
Ortenzio says Carson avoids micromanaging, but he isn't aloof from the business, either. "He was always available, (even when) it was Christmas Eve, and I wanted to talk," Ortenzio says.
Welsh, Carson also has had a long relationship with U.S. Oncology, the Houston-based cancer-center operator and physician practice management company, and one of its predecessors, American Oncology Resources. Dale Ross, U.S. Oncology's chairman and CEO and an AOR founder, says Carson and his firm take the time to learn the business and the company. The firm had no major stake in the company from 1996 to 2001; but since last fall, Welsh, Carson has accumulated a 13.2% stake in U.S. Oncology (See chart, p. 31), according to securities filings.
"Companies do not grow in a nice, straight, linear fashion. There are bumps and setbacks along the way. You want investors (such as Welsh, Carson) with a knowledge of the business so they understand that," Ross says.
Welsh, Carson's setbacks
Even with its impressive track record, the firm made some missteps.
Carson says its two investments in home health companies, including one in Housecall Medical Resources, Atlanta, both turned sour and were sold at losses. "Home care turned out to be an extraordinarily difficult area," he says. "Government reimbursements (which were cut in the Balanced Budget Act of 1997) were part of it, but it was a difficult business to control."
Welsh, Carson also struck out on New American Healthcare Corp., Brentwood, Tenn., which operated as many as nine hospitals and declared bankruptcy in April 2000.
According to securities filings, the firm, its partners and Horizon Investments Associates-which received its correspondence in care of Rocky Ortenzio-first invested in New American in 1995, receiving 5 million common shares for $1.5 million and 485,000 shares in two preferred classes of stock for an undisclosed amount. Welsh, Carson also held at least $25 million in subordinated New American notes, for which it received warrants to purchase 565,000 shares.
By the time New American was about to go public in August 1998, Welsh, Carson and its partners owned 75.4% of the 12.6 million shares outstanding, according to a securities filing. In the initial public offering, Welsh, Carson and its partners bought nearly 500,000 shares at the offering price of $13, or an added investment of about $6.3 million. New American used some of the proceeds of its IPO to pay off the $25 million in notes Welsh, Carson held. Altogether, Welsh, Carson controlled 59.4% of the company, which had a market capitalization of $228.7 million on the day of the IPO.
Carson says all of that equity capital was lost when New American filed for bankruptcy. "It was a wipeout for us. It was a victim of the (budget law). It was a classic problem of the company having too much leverage, and the franchises it had weren't valuable enough to service the debt when the (law) hit its revenue," he says. "The company went through an aggressive acquisition program prior to the (budget law), and we wound up, in retrospect, to have taken on more debt than we could service."
Still, Carson remains bullish on for-profit hospital companies. He sees a lot of not-for-profit hospitals that could be attractive acquisitions for the investor-owned chains, because the for-profits have been able to obtain the capital to overcome the lean years of the budget law, while not-for-profits have struggled to borrow money. "I'd say I'm a little surprised that there hasn't been more activity yet, but I'd say it's coming," Carson says.