With continuation funds gaining much traction in the last 18 months, will healthcare players consider their use as a long-term hold strategy?
That’s one question panellists at Dechert’s Healthcare Deals Conference 2021 last week sought to answer. Reza Fardad, a partner at Bregal Investments spin-out Freshstream, said his firm, which does not have a continuation fund to bid on new assets, might put existing assets into a continuation fund if the need arises.
Viral Mehta, a healthcare/technology investor at PEI Media owner Bridgepoint, added: “We don’t go into it thinking that we are going to hold this asset for 10 years. We’ll continue to think about our usual three-, five-, six-year timeframe…Sometimes we end up holding things for a lot longer, for good or bad reasons.”
Phil Robinson, a managing director at CVC Capital Partners, said he sees continuation vehicles as a “separate asset class” than the traditional buyout model.
“It’s a good tool to have in terms of the right pocket of money to use for certain situations,” Robinson said. “But I do think they have to be the right type of situations for that particular type of capital.”
Robinson added that CVC has a separate fund that pursues a long-hold strategy. CVC Strategic Opportunities II, which does not specifically target healthcare assets, gathered €4.6 billion in 2019 against a €4 billion target, according to PEI data. Since the strategy was created, €4 billion of equity capital has been committed to 11 investments, including French healthcare provider Elsan and Italian pharma business Genetic, according to CVC’s website.
GP-led transaction volume reached $29 billion as of the first half of this year as sponsors increasingly consider the strategy a “viable alternative to typical exit paths for their best-performing asset”, according to a report from Jefferies. Of the $29 billion of GP-led volume, nearly half was comprised of single-asset continuation fund transactions.
The panellists noted that the healthcare sector has become more heated in the last 18 months with new and surprising players. Infrastructure firms and ESG funds are increasingly getting involved in healthcare deals, said Freshstream’s Fardad. He cited an example of a €35 million EBITDA pharma business in Italy where an infrastructure player came in and bid 30 percent more than the straight PE bidders.
That said, consolidation in the industry is what most healthcare firms focus on.
“That’s the most obvious value arbitrage we are still seeing…being able to bolt smaller assets into these larger platforms,” said CVC’s Robinson.
“You have to demonstrate that the sum of the parts is greater – be that through synergies, through operation, through diversification, the systems, the IT, the procurement – I do think you get a better, more holistic business at the end of it.”
Robinson noted, however, that a roll-up strategy is not a substitute for organic growth.
“We would rarely try and create an investment thesis where this is the sole lever to pull. You have to have the underlying foundation…as long as it’s generating cash and some growth, then you have the licence and authority to then do the M&A.”