The fund overseen by Eberts had made a $100 million investment just months earlier, in March 2017, as part of what ended up being a $488 million deal that dramatically raised the profile of the Chicago-based company and its founders.
Eberts, who later retired from Goldman Sachs after 30 years, described why the firm invested in Outcome Health and agreed to let Shah and Agarwal take $225 million off the table. He said the company — which operated a network of TV screens and tablet computers mostly in specialist doctors' offices — was profitable and growing fast.
Outcome Health's revenue had roughly doubled the previous year, and the company was predicting sales would triple to $450 million in 2017, following an acquisition, according to a pitch deck shown in court. The company's operating profit — or earnings before interest, taxes and depreciation — was nearly 50%.
Also attractive to investors was the company's claim that its advertising platform, which targeted patients as they were in doctor's offices for treatment, produced an increase in drug company sales that was twice as high as traditional TV and print ads.
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Prosecutors claim that the company overbilled its clients for advertising it did not deliver, which inflated the company's financial results by up to 25%. Investors who relied on those results were defrauded, the government contends. Shah, Agarwal and Purdy have denied the charges.
The investment deal had an unusual structure. Goldman and others would invest $100 million in a holding company that would go public within four years. When the IPO happened, their investment would convert to shares at a rate that included a 20% increase for each year. If Outcome had gone public after a year, Goldman's stake would have translated into $120 million worth of shares at the IPO. Goldman had used a similar structure in an investment in Uber, Eberts said.
"The structure of our security was effectively providing a 20% return while buying stock in a future IPO, with what we hoped to be a reasonable margin of safety," he said.
Goldman was the largest investor in a $350 million deal that involved other venture and private-equity funds. The total fundraiser ultimately grew to $488 million. The $225 million payout to Shah and Agarwal raised questions for the investment committee.
"We believed the company was worth $2.5 billion or more. In that context, the distribution to the founders would have been a little less than 10%," Eberts said. "Although it was a large amount of money, it wasn't a large proportion of their wealth."
Goldman and other investors, including Google's Capital G and the Chicago venture-capital fund formerly headed by Gov. J.B. Pritzker, ultimately sued Shah and Agarwal to recover some of the money they had received as part of investment after the fraud allegations surfaced.
Coming just months after the deal, those fraud allegations also raised questions over the diligence by Goldman and other investors. Shah's attorney, John Hueston, raised those questions as he began cross examination Monday. He pointed to an email from a member of the investment committee for the Goldman fund, noting that one of the return-on-investment examples seemed small. "I assume we will be looking for many more in diligence?"
This story first appeared in Crain's Chicago Business.