Anthony Harrington of global investment banking and asset management firm Alantra outlines why healthcare and consulting communications companies are increasingly attractive targets for private equity.
The supply of PE money chasing fewer and fewer assets is only going to increase the attraction of healthcare communications and consulting firms to PE investors
Healthcare communications and consulting companies have long presented attractive acquisition targets to larger strategic competitors. It’s not difficult to see why. The best communications and consulting firms are high growth and high margin. They provide sought after services to their biopharmaceutical clients. Furthermore, larger companies have often found building these services organically a difficult task – always a key determinant in the decision to acquire a smaller competitor. From the acquisitive strategies pursued by large marketing communications (marcomms) networks like WPP, Omnicom and IPG, to deals by CROs such as Syneos and IQVIA, there has been no shortage of strategic acquirers snapping up communications and consulting targets. However, in recent years, this relatively stable picture has changed dramatically. The reason is the entry to the sector, tentatively at first, of an aggressive new buying group – private equity.
Private equity (PE) firms had traditionally shied away from the healthcare communications and consulting sector. They were concerned about the quality of earnings, as companies in the sector typically do not have the subscription or repeat revenue streams most valued by PE. PE were concerned about investing in such asset-light and people-centric businesses, commonly expressing the fear that “the whole company can just walk out the door”. And PE were concerned about their own ability to help such companies grow, especially as it is difficult to bolt-on acquisitions to consulting firms whose success depends on maintaining a positive, coherent culture.
A confluence of factors has changed this prevailing view. Firstly, there are an increased number of specialist healthcare PE firms (or specialist teams within firms) looking exclusively at niche areas within healthcare. More knowledge about the sub-sector has led to a greater comfort with the business model of communications and consulting firms. Secondly, there have been a number of conspicuous success stories – PE-backed businesses like Envision and Fishawack have grown and prospered during a succession of PE investment periods. These groups have demonstrated impressive long-term revenue growth, the ability to acquire other smaller firms and integrate them successfully, and they have proved adept at finding and retaining talented employees. Furthermore, these groups often remain led by their own original founders – another factor which has lower the perceived risk of investing in the sector for a PE firm.
On the other hand, it is also fair to say that PE firms themselves were not traditionally the most sought-after partners in the eyes of business owners in this sub-sector – that didn’t “get” the sector. The lack of familiarity and experience worked both ways. This is also changing, although probably more slowly. Seeing highly-awarded and admired businesses like Lucid accept PE investment and continue to prosper has been a strong endorsement for other business owners evaluating a potential PE investment.
Will this trend continue? We believe it will. None of the factors cited above are likely to reverse anytime soon. The supply of PE money chasing fewer and fewer assets is only going to increase the attraction of healthcare communications and consulting firms to PE investors. At some point in the future, that tidal wave of money seeking a home will lessen – it always does. It will be interesting, at some time in the future when investing circumstances are more difficult, to see if the PE universe maintains its newfound love for the healthcare communications and consulting sector.
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