M&A Roundtable: Does Private Equity Improve Healthcare Underwriting?
Join Jon Gilbert and Brian Barger as they discuss healthcare mergers and acquisitions in an exclusive interview with industry experts Rob Langtry and Katie Wagner from Liberty Mutual Insurance. Together, they explore the topic of private equity in healthcare and how it impacts underwriting.
Understand the perceptions surrounding private equity-backed businesses in the healthcare sector, and learn about the unique qualities that make healthcare investments stand out in the crowded M&A landscape. The discussion also sheds light on the specialized underwriting approach required when anticipating add-on acquisitions in the healthcare industry.
You're listening to the Alliant M&A Roundtable providing insights and expertise on the unique risk management needs associated with private equity firms. Here is your host, Jonathan Gilbert.
Jon Gilbert (00:20):
Well, thank you all for joining us for another episode of the Alliant M&A podcast. With us are Rob Langtry and Katie Wagner from Liberty Mutual, as well as Brian Barger, who is a member of the M&A team, and also a leader in the healthcare industry as well. Today we're going to discuss topics relative to the private equity industry and the focus on healthcare investments. We expect 2023 to be a very active year in the healthcare sector, despite some other headwinds that may exist in the M&A market. And with that, I'm going to turn to Brian Barger to start the dialogue with Katie and Rob.
Brian Barger (00:52):
Thanks, Jon. So, diving right in, Rob and Katie, what is your perception of private equity backed businesses and specifically those in the healthcare industry?
Rob Langtry (01:05):
Yeah, Brian, so I can comment on this, and I'll let Katie really handle the healthcare piece, but talking about private equity in general, I think it's important to take a step back and really think about the thesis and business model of private equity. They come in, buy a company, hold it for, you know, say five, seven years, and then look to sell it at a multiple, at a higher value than what they paid. And they do this by risk control, safety. What are they doing to really improve this company and put in the proper capital that's going to line up well with, really, what an insurance carrier's goal is - make it a better risk, safer, better supply chain. You know, having a partner, the PE firm that's invested in these portfolio companies, in a way that really overlaps with what we're looking for as an insurance carrier, makes this an attractive space. So, we really like the private equity industry and they're also focused on so many different industries. If you look at what private equity invests in, it's nearly every company under the sun. They're looking at every industry. So, we have specific appetites. Every carrier's going to have things they're good at and private equity's going to be investing in that space. So, it's looking to partner with the PE firms that are focused on the industries that the carriers like.
Katie Wagner (02:19):
Yeah, so we really have seen a lot of private equity investment specifically in senior care, digital health and telehealth. And when we talk about and think about private equity, like Rob mentioned, we are trying to concentrate on how are they planning to operationalize their involvement in these healthcare companies. So, Rob mentioned risk control, what resources are they planning to put forth and really what are they planning to do differently than what has been done in the past. So, understanding the legacy exposures of that business and the leadership of the organization, their loss experience, is really critical. Understanding the PE firm's philosophy and strategy and how they operate, what are their long and short-term goals, that's something that we're looking to really understand. Are they planning to hang on to these assets for a long time or a short amount of time? And then really understanding the PE firm on a broader basis. So like Rob mentioned, they likely are involved in many other types of businesses and trying to recognize if there are any headline risks. So, have they been in the press for anything else in their other businesses that might reflect upon their new involvement in the healthcare asset that they're purchasing is something that we keep an eye out for.
Brian Barger (03:37):
So, it sounds like you guys are definitely interested in private equity-backed risks. Would you say that the private equity involvement makes healthcare companies more favorable from an underwriting standpoint?
Katie Wagner (03:51):
Yeah, so I think that there are benefits and detriments to the involvement of private equity in the healthcare entities. So, positive they likely have strong financial backing and, you know, are going to bring an infusion of capital into new investment and hopefully have some stability. We'll be looking into are they a firm that specializes in healthcare and trying to get to understand their leadership team's initiatives. So, when they become involved, what is going to change and does the leadership executive team have healthcare experience? What are their end game goals and the changes that they're going to make. So there certainly are benefits and there are concerns. So, another aspect that we look to really understand from that firm when they become involved is how do they view insurance. So are they involved in many related, let's say senior care entities, that they're consolidating their insurance program into a master program, how do they view the limits that are needed to be purchased. And so, these are just all things that we look to understand as the involvement with PE can then become more diversified, in addition to just a standalone entity that is, you know, privately owned.
Brian Barger (05:08):
And maybe Rob this would be more geared towards you, given that you see risks across many industries, but what would make a private equity backed healthcare business unique from those in other industries?
Rob Langtry (05:26):
Yeah, and I think what's important when we're looking at a submission and when they come in is, you know, the PE firm did the due diligence on this risk. What did they see that made them invest and see an opportunity with this company? I think sometimes that's left out of the submission, or the underwriting, or the conversation and it really shouldn't be, this is critical, this is what we're trying to understand as an underwriting company is, what is going to be changing at this company. So, we'll take healthcare, but this could really be, I think any industry. When you're looking at a PE deal, there's two phases. There's one, the initial point of acquisition. PE firm is buying this company. They did so much due diligence, they're then coming in and may have a hundred-day plan. This is what happens when we first buy an organization.
We should understand that as a carrier, what's changing? How is new ownership, new management going to really improve this company? And then there's the hold period 5, 7, 10 years the PE firm's going to continue to put capital into this company and we need to understand what's going on there and how that's going to make this a better company. I think an example's helpful here. So, if we get a healthcare submission in, Katie's looking at it, hopefully we get 10 years. I know in PE you don't always, but hopefully we're getting a 10-year loss history. The PE firm may have acquired them three years ago. We can look at the last three years and know this is the new owner, but what's different now and will that continue? If losses are much better from 2020 to 2023, we need to know why that's going to continue and what changed from 2013 to 2020 to now not just saying it's a new owner, this is what's happening, it's what changed with the new owner.
How that's going to continue and potentially and hopefully continue even after the sale of this company. You know, if we're getting on it as a carrier, hopefully that relationship continues beyond just the PE relationship. So, I think both in healthcare and non-healthcare, a big difference in this space is understanding what the PE firm's doing and translating that to the broker and the carrier. So, we're all on the same page of how this risk is changing. And in the healthcare space specifically, there could be a lot of different changes, claims philosophies, reserving philosophies, settle verse defend. So those are areas to really understand and need to be communicated upfront.
Katie Wagner (07:43):
Just to add on, when we look at healthcare, I think what makes it a different industry or separates it from other industries is that it truly is the business of caring for people's lives and health. And really no matter what is going on in the world, in markets, in any sort of aspect, people are always going to need care. And that need is just increasing as people are living much longer. The other unique aspect about healthcare, I would say is that there really is a specialized plaintiff's bar that is, you know, nationwide and pretty complex. So, understanding the plaintiff's bar itself and understanding different jurisdictions nationwide is really important so that the PE firms do not get involved in or play into the historical profits over people mantra that the plaintiff's bar perpetuates.
Brian Barger (08:37):
So along with that point, Katie, do you see corporate practice of medicine as a hurdle to the underwriting process?
Katie Wagner (08:44):
I think it's just something that we really try to understand and connect with our claims, look at our historical experiences with like entities that are within our portfolio already, and then connecting with the PE firm and the entity itself to really understand what the claims’ philosophy is within their organization.
Brian Barger (09:07):
So, it sounds like you guys, you know, have a handful of different things that, that you like to look at when evaluating a risk. Are there certain things that you would like the funds as well as portco's to know that may help make insurance placements more efficient? Whether that be, you know, backroom, underwriting process, information gathering, methodology, et cetera?
Rob Langtry (09:36):
I think it's incredibly important to understand that private equity firms have so much buying power, the economies of scale when they look at their whole portfolio. So, we need to understand that as we're looking at a submission ourselves. So, if Katie gets in healthcare risk, we're talking internally about what's Liberty's overall relationship with this PE firm, premium across the whole organization. There's so much that could be going on. So, it's understanding as we're looking at a specific company, what our organizational relationship is with this PE firm and our experience. Have we performed well on their portfolio companies, their portfolio companies in the healthcare industry. We need to look at it really as a big picture. And we're seeing more and more PE firms with their brokers and working with folks like you. Understand this, we love that more PE firms are starting to get either a risk manager or an operations partner focused on insurance. I think that's super valuable and has proved effective and that's where we like to plug in and talk big picture.
Jon Gilbert (10:33):
That's a great point, Rob, and does that make liberty pretty unique from a market standpoint compared to other insurance companies that may have a more limited appetite for non-healthcare investments or maybe even jurisdiction?
Rob Langtry (10:48):
Yes, you know, we're looking at this globally. Our relationship with specific PE firms across everything that Liberty can offer. You know, every carrier plays in the PE space. We had premium in this before we really even had our private equity practice in place. The submissions were coming in, we just sometimes didn't realize they were private equity backed. Most of the time we didn't realize they were PE backed. Now we're using that to our advantage. And I think what makes us unique is building really strong relationships with some PE firms. We know some large PE firms may use multiple brokers and we want to be the carrier contact regardless of who we see it from. The more we are aggregating this to specific brokers, specific carriers, trying to make their portfolio, you know, a little more streamlined, which is helpful. So, we're unique in trying to develop some of those direct relationships and translating that to when the opportunities come in, prioritizing them, making sure they're top of the pile and we're being as aggressive as possible if it's a class of business we like. So, I think that does make us unique.
Jon Gilbert (11:46):
No, that's a great point. And how do you approach, just to kind of go off maybe on something we touched on earlier, but how do you approach it when there's an anticipation of doing multiple add-on acquisitions and you know, really underwriting, you know, what becomes a larger company, whether it's, you know, over a course of a year or two years or three years. How does that change kind of your view from an underwriting standpoint or otherwise?
Rob Langtry (12:09):
I can talk high level and then Katie can get into some specifics, but we love to know that upfront, hey, this is a platform acquisition. There's going to be add-ons. If we know that going in, obviously we know this is going to be a growing entity. All the time, we see that with PE firms, this is going to be one. They'll say, you know, XYZ HoldCo. They'll even name it in a way that, hey, this is going to be a growing entity. More and more add-ons are going to happen, and we know we need to work quickly with those add-ons, help with the due diligence or it could be completely different operations. We've had some add-ons that, unfortunately, are not really a class of business we love. We try to be as flexible as possible, but if you're buying a supplier while you're a manufacturer, it may not exactly be the same rates that we wrote the first one for. Some add-ons are going to be the exact same, you know, a competitor that's doing really the same thing, easy to kind of merge in. Some are going to be really different. It makes sense from PE and from the strategy to grow the organization. But from a carrier we really have to underwrite that add-on as well.
Katie Wagner (13:08):
Yeah, and I would just add to what Rob said, sort of more from a conversational standpoint with the client in the beginning of the underwriting process to understand the vision of growth to come. That's really critical in the beginning of a policy period and then understanding what limit they deem appropriate or are looking to carry. Do the limits grow as they continue to add on new entities? What jurisdictions are they looking to grow and where and are they specializing in a specific regional area or are they growing nationwide? That is all taken into consideration during the underwriting process and understanding, like I mentioned, the vision from the beginning of the year is really critical to make the ease of adding these entities on throughout the year as easy as possible.
Brian Barger (13:56):
Great. And so, it's not necessarily emerging, but certainly relevant and top of mind for a lot of our clients and prospective clients would be transactional liability. And so, Rob, where do you see that market heading into the next year and more specifically, do you think that there's any differentiation for healthcare risks when talking about transactional liability solutions?
Rob Langtry (14:25):
Yeah, so I talked to our global transaction solutions team. Similar to last year, you know, carriers are treading cautiously. 2021 was just record years for activity deals and everyone who plays in this space, you know, between geopolitical turmoil, labor shortages, a potential recession, increased interest rates, there are headwinds as we've mentioned, and every carrier in the reps and warranties, transactional liability space is aware of these. We also view our clients as resilient. We know that deals are going to continue, capital's there, there's dry powder, so money that's raised by these PE firms looking to spend, it's been raised, they've done their fundraising rounds. So, the capital's out there and I think with valuations a little lower, there's opportunities to be had, especially in healthcare, don't expect deal volume to return to 2021, but do expect a lot of deals to hit the market. Potentially more smaller deals, just not the really large acquisitions that we saw really in 2021. When it comes to healthcare, we take a really cautious approach in the space, we do write deals, we do write reps for healthcare risks, but they're generally linked to some higher severity claims on the reps and warranty side. So, we do take a cautious approach but see a positive outlook. Like we said, we still see or anticipate a lot of healthcare transactions just because it's such an appealing class for PE firms. So, the acquisitions will be there, we'll be underwriting them, but do take a cautious approach when it comes to healthcare reps and warranties.
Brian Barger (15:53):
Good stuff. If you had a crystal ball, how do you see M&A activity impacting claims activity over time?
Katie Wagner (16:02):
So, some of the trends that we have seen thus far with some of our PE clients is really understanding that a PE firm can be targeted more frequently for several reasons. One of them being whether it's real or perceived on behalf of the plaintiff's bar, that there are more assets including insurance limits of liability available for claims and that these entities will lend themselves to a more popular plaintiff attorney argument of profits over patients. So that's something that, you know, we need to be careful and to keep our eye on. With mergers and acquisitions, there may be additional concerns that the staffing is going to be reduced. So as Rob was mentioning earlier when we were talking about risk management, it's really important to understand and to keep consistency that the training and supervision risk management protocols stay in place and that they are not impacted. Should they be impacted, that can certainly result with more medical incidents leading to claims. And then just simply when there is an ownership or investment change in an organization, there likely are ongoing claims from the prior owner/operator/facility/hospital, whatever they may be. So, it's keeping some continuity between the handling of those claims moving forwards that they're not disrupted and lead to less favorable outcomes due to this change in investment.
Jon Gilbert (17:30):
Well thank you both. Thank you all for joining Katie, Brian and Rob we had very lively discussion on what's to come and what excites us about the healthcare market, particularly for private equity investors. With that we'll close out here and if you need more information, please visit us www.alliant.com. Thank you.
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