Private equity is not dead yet. And quit asking for so much money when you sell your company: Its not 2006 any longer. Those are the messages that financiers have been delivering to healthcare service providers at a couple of recent events.
At the Nashville Healthcare Councils Financing the Deal event last week, Charles Ditkoff, of Banc of America Securities said, Ive never seen anything like the last two years, and I dont think were going to see that again. But Ditkoff, a managing director and head of healthcare services for the investment bank, said private equity is still open for business because the firms investment funds are still attracting huge sums of money. Ditkoff made the same point at McDermott Will & Emerys symposium on private equity in healthcare, held in late April in Miami.
The price of deals is going down because banks are refusing to take on the equity risk that they took on in the run-up to the credit crunch, Ditkoff said in Miami. Instead of a private equity buyer putting in 20% cash and financing the rest, the cash component is more like 40% to 50%, and that ultimately lowers the price, Ditkoff added. In Nashville, naturally, Ditkoff used the example of HCAs 2006 leveraged buyout, which featured about an 83%-17% split between debt and equity.
Former U.S. Sen. Bill Frist (R-Tenn.), whose family founded HCA, moderated the panel in Nashville. Frist joked that being Senate majority leader is like managing a cemetery: Youve got a lot of people underneath you all the time, all day long, but none of them ever listens to you.
Like the family company, Frist has embraced private equity. Hes a partner and chairman of the executive board of Cressey & Co., a Chicago-based private equity firm with roots in healthcare services. Co-founding partner Bryan Cressey also was one of the founders of investment firms that have backed Nashville-area hospital companies such as Province Healthcare Co., Essent Healthcare and Capella Healthcare. Frist is starting a Nashville office for Cressey & Co. with another Nashville heavyweight, Ralph Davis, who departed the law firm that serves the citys for-profit healthcare world, Waller Lansden Dortch & Davis, where he had been partner and chairman.
Perhaps showing some of the New South optimism that Nashville is known for, Frist noted that not too many sectors of the U.S. economy would enjoy even the moderately positive forecast that Ditkoff made for healthcare services.
In an interview after the program, Frist said he hopes that the Nashville office of Cressey will bring more mid-market financing to Nashville companies that are ready to take the next step beyond venture capital. Companies like HCA go to Wall Street, Frist said. Start-ups can get some venture capital money. But theres nothing to help those businesses scale up. Frist hopes that Cressey & Co. can marry the money of investors with the management talent of Nashville. After 20 years in medicine and 12 years in government, Frist said that he knows the way to improve healthcare in the U.S. is to capture the genius of innovative creative solutions dreamt up by the private sector, particularly in Nashville.