ACA promotes investment prospects

Growth opportunities are emerging in new more efficient and innovative business models as the Affordable Care Act produces a dramatic shift in the healthcare delivery and payment, according to financial executives participating in a panel last Friday.

The investment experts also said they anticipate merger and acquisition activity (M&A) to pick up later this year. The briefing was sponsored by the Nashville Health Care Council, which made the event available via phone to reporters.

James McLain, senior vice president for Brown Brothers Harriman, said his firm is eyeing companies that are “truly attacking the core problems,” whether it’s transparency, outcomes, prices, or care coordination.

“These are the macro themes to build investment pieces around,” he said. “The net effect is that these are the companies that are going to be supported by payers, gain a reputation for excellence, and more volumes of patients will come to them.”

McLain said that IT companies will also be sought after if they are focused on solutions for the core problems of linking care settings together and making data available. “Care management will have to become a core skill for most providers,” he noted.

Right now, M&A activity is quieter than one would expect, according to Ralph Davis, a partner at Cressey & Company. “For healthcare executives and management teams, health reform is very real, but there is a lot of uncertainty,” he said. “Later in the year, with more clarity, M&A will pick up.”

Jonathan Morphett, managing director at Avondale Partners, explained that after last year’s robust last quarter, it was time “to take a deep breath.” He anticipates that will change later in the year. “But there will be more strategic mergers taking place,” Morphett said.

Where there is activity now is in the behavioral health sector, with transactions combining behavioral health companies or merging with other medical organizations, he said.

Competition to make an investment is also heating up. “Last quarter, 55-60 percent of all deal volume were transactions of $100 million and under,” said Brian McCarthy, vice chairman of healthcare investment banking at Bank of America Merrill Lynch. “Our problem now is that once we find a really good company, there’s usually a lot of competition also willing to write the check and be in a partnership.”

Opportunities in the middle market are abundant. “Very rarely would we consider an IPO for our companies,” McCarthy said. “There’s usually enough private equity interest to sponsor a deal or play a strategic interest."

However, McClain forecast that “2013 will probably be the busiest year for healthcare IPOs in over a decade. The queue is building,” with about six companies about to access the market.

Davis pointed out that from an investor’s perspective, a disciplined clinical discussion of what constitutes a quality outcome is still missing. “The more that clinical partners can come up with real metrics that you can manage, and if you manage them well will make a difference, the better off we’ll all be as customers of a system as well as investors in a system,” he said.

Also yet to be realized are accountable care organizations. They are early in their rollout and “…still a theoretical discussion instead of a transaction driver,” McCarthy said, with the panel in agreement.