Podcast - Minority Deals in Healthcare Private Equity: An Evolving Opportunity for GPs and Founders

Morgan Ribeiro: Welcome to Counsel That Cares. This is Morgan Ribeiro, the host of the podcast and a director in Holland & Knight's healthcare practice. On today's episode, I am joined by my colleagues David Marks and John Arnold, who are both partners in the firm's Healthcare Transactions practice, and Rahil Manji from Clairvest Group. In today's conversation, we are excited to discuss the current landscape of private equity in healthcare, and we'll explore key investment trends, Clairvest's unique partnership model, the benefits of a minority investment and more on this episode. Before we dive in to the meat of our program, I'd love to provide our listeners just with a brief introduction to each of you. David, I'll start with you.

David Marks: Thanks, Morgan. David Marks, I'm a healthcare private equity lawyer at Holland & Knight. Seventeen years of practicing law, it's hard to say, but is what it is. Proud member of the team at HK, along with John and a number of other close friends who are still ranked number one in the country in healthcare private equity deals closed. Recently awarded Private Equity Law Firm of the Year. My time is spent in healthcare services and the ecosystem that's around it. So that's really giving and receiving healthcare. So provider deals, doctors and dentists have been bread and butter for our team for many, many years, with an increased focus now in operational improvements. So things like AI tools, healthcare IT, as well as other areas besides the traditional provider plays where there can be real meaningful improvements, whether it's on the reimbursement side or just improving patient experience. So things like infusion, pharma services, and at the end of the day, across the entire spectrum of it, we're really helping clients get money, spend money and make money.

Morgan Ribeiro: Amazing. All right, John.

John Arnold: Thanks, Morgan. David, you did a great job explaining our practice. Mine is quite like yours. It's what I do day in, day out, with an emphasis on representing PE sponsors and their portfolio companies, but also in advising founders and others in connection with exits.

Morgan Ribeiro: Great, and Rahil, you know, Clairvest is known for its long-term collaborative approach with entrepreneurs. So can you tell us a little bit more about yourself and a little more about the firm?

Rahil Manji: Yeah, thanks, Morgan. So yes, my name is Rahil. I'm the vice president at Clairvest. I've been at Clairvest for about seven years and focus all my time in the healthcare services space. So a bit about Clairvest. We were founded about 40 years ago by a group of entrepreneurs who've been successful in their own ventures. And they wanted to help the next generation of entrepreneurs be successful. And that's how we started. We've been around for over 40 years with a really successful track record over that time, and we're currently investing out of our seventh fund, which is about $1.2 billion. But over that time, what's important here, I want to make clear, is that the philosophy has not changed. We remain solely focused on partnering with entrepreneurs and founders to help them scale their business.

So there's really three key differences between kind of how we approach private equity and I'd say most. The first big difference is, we're very focused on strong alignment with founders and the management teams. Which means more often than not, we're minority investors alongside the founders and the management team. The second big difference, and related, is that we are also very aligned. So 25 cents on every dollar that we invest comes from the team at Clairvest and the board. So we really think about it like it's our money first and that we're very aligned personally with the founders of the businesses and the businesses we invest in. And then lastly, we're domain focused, which, if you look on our website, we invest across a bunch of different industries as Clairvest, but I and my team spend a lot of our time in healthcare services. And we have two dental investment, two dental platform investments and one physical therapy platform investment, as well as over our history we've been invested in home health, EME, home infusion, life sciences, etc. So that's a little bit about Clairvest.

Morgan Ribeiro: Awesome, that's really helpful background as we head into this discussion. As we think about sort of larger trends right now, 2024 saw a surge in healthcare private equity. 2025 definitely presented new challenges, including just ongoing macroeconomic uncertainty and obviously regulatory changes at the federal and state level. John and David, could you give us a lay of the land on how liquidity pressure in particular, both to deploy and return capital, and public pressure are pushing healthcare private equity firms to rethink their approach on portfolio company economics and governance?

David Marks: Well, Morgan, I think it's helpful to understand, or situate, where we are today in a broader historical trend. If you look at the first decade or so of private equity investment in healthcare, and even before that, when it wasn't private equity, especially in the PPM space, it was public companies in the '90s. And you see a lot of what really differentiated that time period is you had a focus and significant returns due to arbitrage on multiples and financial engineering due to cheap debt. And what we saw in the last few years due to rate spikes was really a revelation. There were a lot of fractures in a lot of PPM rollups in particular that had not achieved real integration as they're going out and acquiring and building these companies. They had a lot of cheap debt dependencies when it came to CapEx and OpEx where instead of being able to actually operationalize and achieve some of the stated reasons for doing the rollups, like better payer negotiation, achieving "synergies," that buzzword, but doing it in real ways where you can provide revenue cycle management improvement, accounting improvement, better just operating and financial controls. Instead, you have people being cut, you have the need to manage your cost, and that coming at the expense of good business with some of these companies. In the meantime, the stigma with some of these businesses was making it harder for even the good ones to exit.

As time goes on, and a lot of these companies have been held for quite a long time, or long in the tooth with a lot of these private equity firms, you had two pressures really coming into play. They seem like opposites, but it's just creating tension. So on the one hand, you have a lot of these healthcare private equity companies, especially in the PPM space, that are being long held by private equity funds that need to exit and not able to achieve a really adequate or ideal return, especially with the way that waterfalls in "the capitalization was done for those early stage investments." And second is you've got a whole bunch of commitments, dry powder, where you have LPs who have committed to provide funding and their money is essentially tied up in short-term liquidity, high-liquid securities, so that they can provide money when called. But that money is not actually being deployed yet because there aren't as many good opportunities for new entry points. And the two factors together put a combination of massive pressure on the GPs to exit and achieve real distributions to their LPs, but also to take the money and actually invest it. And so you're seeing a combination of innovation in waterfall structures, in debt structures and strategies to deal with these rate increases, as well as new forms of deploying the capital, whether it's in co-invest, minority investment. It is forcing fundamentally a real focus across the board for GPs to spend their time and energy building up operational capabilities and proving that they can actually achieve real operational improvements. And I think that is the hallmark of what we're seeing on a go-forward basis in terms of what differentiates GPs from one another.

John Arnold: I agree, David. It creates somewhat of a cyclical issue where you have a limited buyer pool because buyers and lenders are taking more a conservative approach to growth. There's leverage issues, and that just reduces the pool of financial buyers who are willing or able to recap platforms. Other platforms are simply too large for some financial buyers. And then you've got a limited seller pool because there are some assets out there that are not in the position to demand the multiples needed to generate the required return, whether it's due to slower than anticipated growth or other factors.

Morgan Ribeiro: Great, that's helpful to kind of understand the landscape and then where, of course, Clairvest fits into this. So first, Rahil, do you agree with the assessment that John and David have provided?

Rahil Manji: Yeah, I agree with that. What I would say generally, from our perspective, is we remain very excited about healthcare services. I think there are a lot of good opportunities to partner with good entrepreneurs and build strategically significant businesses in the space. At least from our perspective, we've obviously seen and heard of the same macroeconomic uncertainty and regulatory changes. Our view is, at least from a demand perspective, it's still stable in the long term, especially if you're kind of on the right side of healthcare and the trends, and as well as partnered with good people in the space.

John Arnold: I think that's right. On the regulatory front, what we have seen, I think, is stability over the last, say, six to 12 months. There's approximately 14 states today that have some sort of healthcare transaction reporting law in the books. These laws can vary from very short, simple preclosing notices to extensive filings to state regulators who have to approve the transaction before the parties can close. We monitor these laws and related developments on an almost daily basis, and we have a great navigator on our website as a one-stop resource for quick reference to kind of understand obligations and applicability and what's on the radar in other states. And that may be on the legislative agenda for this year. But that reflects a big uptick in new laws, new regulations that reacted, in large part, due to systematic issues in the healthcare system.

And as a result of those, in many states, private equity became an easy target, I think, for regulators. Do they get everything right? No. But are they the problem? No, there's bigger issues at play. I think a lot of these laws reflect political agendas on the part of legislatures and attempting to say they got a win and say they did something about the problems that exist. But in the last six to 12 months, I think the number of new laws being proposed is starting to slow down. I think where there was going to be legislative action in many states, it either happened or it has died. And we have a relatively stable framework in the majority of states, even in states that are traditionally more challenging from a regulatory perspective. The filing requirements in those states can be navigated. May it extend your transaction by 30 days? Perhaps. Is it going to create a significant issue for transacting in those states? No.

David Marks: I totally agree. And there's something to be said for why is it the case that a lot of these, whether it's in the media or just within legislatures, there's so much focus on regulation. And I think it's not for regulatory sake. You know, maybe there's a little bit of that. But what's really going on is there's lot of healthcare businesses out there that are not well run. And everybody knows that because anybody who goes to the doctor has had experiences where there's lack of integration. You know, if you ever are in need of fertility services, there's a real lack of coordination between women's healthcare on the one hand and urology for men on the other hand, and even between the OB and the fertility specialist and the banks. That's just one example, but there are many, many, many, and everybody's familiar with it. And the background is this overwhelming demographic reality that people need these healthcare services. So what seems in some ways to be a concern is really evidence that there's opportunity, because if you believe that there is opportunity for making the delivery of healthcare service better, which I think anybody in the United States who's ever received healthcare thinks that, right? When you go to the doctor, that's pretty much what everybody thinks. Then, and if you're bullish on things like AI, right, one of the best use cases for AI is in provider spaces. There's a lot of opportunity here for that kind of operational improvement, but there's also, I think, a recognition that, yeah, that opportunity is because it's really not been enough of a focus, and I think it's pretty exciting to see what happens for the next five years.

Morgan Ribeiro: So Rahil, speaking of all these trends and the macroeconomic landscape and regulatory changes, do you find that those trends are leading entrepreneurs to have more interest in your model, that minority investment?

Rahil Manji: Yeah, so I think it's both of the trends in terms of the healthcare regulatory, as well as just where kind of valuations have come, are kind of leading to interesting trends. Which is, I'd say overall, like while new deal flow has been slower than it was kind in the 2021 to 2023 period, high-quality, good assets are still attracting good valuations and competitive processes. And kind of to David's point on like there are really good, well run businesses out there that are growing and that provide good care, etc., some of the macro uncertainties, as well as some of the challenges with general partners and LPs and returning capital and dry powder, have driven more interest from entrepreneurs and more interest from GPs of doing minority and structured-type deals instead of full buyouts or full sales. Especially, I'd say, over the last 12 to 18 months, we've at least noticed a lot more of that. To be clear, we've been doing minority deals for 40 years. And so really our view is like, it is just very important for entrepreneurs to think about and ask themselves, what are they looking for in a partner? Because there really is a lot more of an art to a minority deal because it's not just about the dollars as it is in a full sale. And then the other thing I'd say just on this note is like when you look back at many of the deals that have happened in the space over the last kind of five years, there have been a lot of learnings, both I think from the entrepreneur and founder community as well as the buyer community. It's what providers are sometimes looking for in a deal doesn't always align with what a majority buyout provides. And I think that's just important to think about.

The only other part I'd add to this is the type of entrepreneur kind of archetype that we look for, I actually don't think has changed much. You have strong entrepreneurs who built their business and who have a strong vision of where it wants to get to and just need a partner to help them get there that's done it before. Our entrepreneur partners are very focused on remaining in control and owning as much of the equity upside as possible, and what we provide is not a common model that's out there regardless of now or in the past. And the reasons are one, they're looking for capital to grow and do M&A, two, derisking their personal lives. So taking some chips off the table that allow them to then go and scale more aggressively and take that risk, three, cleaning up messy or complicated shareholder structures that really align the cap table for future growth that everyone's kind of aligned rowing the same boat, and four, strengthening the balance sheet if needed.

Morgan Ribeiro: Can you speak to post-close, what that looks like in terms of your involvement?

Rahil Manji: Yeah, so post-close for us in a minority position, what I like to say — and it is really true — is we are as involved as our partners want us to be. Many today, especially with the different options of minority or structure investment out there, there are a lot of minority investments that are just very passive in nature. We don't do that. We can be very involved if our partners want us to be, we can be hands off if, you know, they're doing something where they don't need our help. But for the entrepreneurs, it's really important that they understand who they will be working with post-close, what the cadence of meetings and communication looks like and ultimately, where people will want to help or not. Because there's a whole spectrum, and it's really critical to get deep into that before doing a minority deal.

Morgan Ribeiro: Great, so kind of on the flip side, how does Clairvest's partner-oriented approach influence your deal sourcing and value creation in the healthcare space?

Rahil Manji: Yeah, so ultimately by taking a non-control minority position, we need to and we are focused on aligning our interests directly with the founders and owners who are all in next to us. So we're sharing the risk and having a shared long-term view that allows us to be as clear as we want partners, to help them source transformative add-on acquisitions, recruit key talent, build a management team around them and build operational competencies to scale the business. This approach overall builds trust with them because we're helping them in the trenches with them, but it also ensures that we're working hand in hand with them to build a better and more strategically significant business, versus just trying to financially engineer our way to a quick return, which has led to a lot of obviously negative situations in healthcare specifically. From a sourcing perspective, ultimately, like I've said a few times now, we're looking to partner with someone for the next five years. Relationship development is key. Obviously, while the terms and the transaction structure are important, it's also important to ensure that you and your partner have the same values and aligned vision for the long term. And for us, part of that means we immerse ourselves into industries that we believe will be long-term winners, well in advance of when we do a deal. And so that looks like meeting multiple stakeholders, attending events, etc., so that, a), we have a lot more conviction when we find something we like, and b), we can be better thought partners to entrepreneurs, again, because of the relationship in a minority angle.

Morgan Ribeiro: Great. And you talked about this earlier about sort of why companies are typically interested in going with a minority investment. Can you talk about some of the key operational strategies that you're employing within your portfolio right now to drive that growth and efficiency?

Rahil Manji: Yeah, for sure. So I'd say I would categorize it across four buckets. First, with the management team. We're partnered with the founder or the owner of the business typically, and we help them build an A-plus team around them. So this is critical across finance, operations, revenue cycle, compliance, HR, marketing, etc. Second, similar as on clinical operations. A lot of times the providers, you know, want to focus on clinical work. And so building systems and processes around them that allow them to focus on the clinical care and not worry about the ever-increasing administrative functions and burdens of the healthcare system. And we talked about it a little bit, but we're seeing already very significant efficiencies across documentation and coding using AI. Third, on a similar vein, back office efficiency. So our view, and we've seen it, is that once you have the right data, technology and systems in place, there are a lot of efficiencies to be had across all these administrative functions. Both finance, RCM, and then as well as marketing and HR. And all of these things obviously help our entrepreneur partners, but also help our businesses to really ultimately end up focusing on what's important, which is providers providing very good clinical care to patients. And lastly, four, I think ever more important today in a long time is having a very strong payer relations function, which a lot of our entrepreneurial companies don't necessarily have, and we've seen and can help them build.

Morgan Ribeiro: Yeah, for sure. And we've definitely seen that as well with our clients. Access to talent and technology seem to be key differentiators. What advice do you have for healthcare entrepreneurs or management teams currently considering a private equity partnership?

Rahil Manji: Yeah, so I think overall again, it's a big focus of ours. We're seeing it more and more in deals, is just, like, entrepreneurs are focused not only on the money, but like what values are shared with their partner, but also, how can you help? It's not just about capital, it's also about the relationship. I would also add onto that, healthcare is nuanced and complex. And so finding a partner who understands the healthcare landscape and can really help you navigate that at scale is obviously very valuable. And then lastly, for us, it always comes back down to a long-term alignment on values and vision. And that's something that we spend a lot of time on in our investment committee to make sure we understand and are aligned.

John Arnold: I would be curious in how your minority structure impacts the typical hold period and life cycle of the company as opposed to traditional private equity. One thing that we're seeing now — David, I'm going to speak for you because I'm sure you're seeing this now — but like just this week I can think of at least three conversations I had about a new portfolio company or newish portfolio company where on both sides, buy ins and sell side, where there's been a comment made about, "Oh, we're having to think we may hold this company six, seven years from now still" That used to just never be part of the discussion. I don't know what your guys' kind of timeline is and if that's something that is worth noting or talking about.

Rahil Manji: Yeah, I'm happy to talk about it. I think I like that when we're a minority investor, like, yeah, while we will typically have a drag right after kind of four to six years, ultimately, we're partnered with a management team who we're going to listen to when it's the right time. Like, if they've achieved all their objectives in four years, you know, we're happy to go. If it's, if we're five years in and they see an ability to double or triple the business again in a few years, we're going to listen to, you know, trust them and assuming logical and go with that. And then because we're the biggest LP in our own funds — like we have more flexibility and I'd say, on average, probably hold businesses a year to two longer than most — we have that ability and we're fine doing it.

David Marks: There is a point to be had that, I mean, I haven't actually seen it that much yet, but I had another fund raise the point to me yesterday, that if they go to market and there's just not the right fit for it given the size, that they're like, "Look, we like the asset enough, we would just do a continuation vehicle." And if you do that, then they're like, "Well, we would seriously explore getting minority investment in parallel."

Morgan Ribeiro: Well, I mean, John and David, we discussed earlier, the liquidity crisis. There are massive pain points around liquidity. And I know Rahil, you've also discussed this a little bit, but can you talk about how minority investments are a way to respond to those pain points, David?

David Marks: I'll start by saying that there's a very obvious play here, which is that minority investments allow for greater governance for whoever holds the rest of the equity, whether it's an existing controlling sponsor or founder. But in the context of increased cost of capital, what we're seeing are some changes in the waterfall, and we think these changes are here to stay as compared to maybe five-plus years ago. One of the most significant differences is we're seeing a significant increase in the rise of participating preferred equity with the double dip feature, something like 12 to 15 percent returns on that. And that is partly a recognition that, OK, if you're going to do a minority investment, you're giving up the opportunity for control. Especially with the founder, you're making a bet on that founder and letting that founder be empowered and run a lot more. At the same time, it's structured to compensate the minority investor by saying, "Look, you're going to get more downside protection, as well as a bit of a guarantee minimum," which is important for fundraising purposes. One interesting thing that we're seeing is, with these vices of equity, is an increased ability to sell it in a secondary transaction without a tag right, or maybe it's a more limited tag right. Especially when it comes to healthcare providers, their ability to glom onto it. Historically we might have seen something like a 20 percent forced rollover concept, you know, we're seeing 50 percent these days, and sometimes for these minority slices, depending on the nature and the sizing of it, there's a recognizable ability to say, "Hey look, it's for everybody's benefit for that security to be more tradable than it was or would be if this were a control transaction." That allows for a lot more flexibility for the GPs as well to, if it is a GP-controlled investment, to offer co-invest to some of their LPs and fundraising grounds. But even for founders, you know, it allows them to get access to capital cheaper than debt right now, while still preserving governance control, but giving a reasonable return and protection to a minority investor.

John Arnold: Yeah, I think founders are also being asked to roll over more than they have been in the past. In part, I think that is due to buyers wanting to maintain higher valuations, even though the valuations have stabilized somewhat. So they will say, "All right, we'll roll over more." And David, you were talking about CV deals and kind of partial sales to allow for liquidity, new equity to fuel growth. In connection with that, there are evolving terms and evolving market norms on things like tag rights. And what does that mean in a founder deal where the founder is rolling $50 million of equity? They could potentially be forced to roll at a recap, and are they forced to roll if it's a CV deal? Are they allowed to tag along with the CV deal? Things like that, which I think is playing out in real time. I don't know right now that there is a market norm. I was talking shop with a partner at another firm recently on how they are definitionally in their LP agreement or LLC agreement, how are they addressing this tag right issue.

David Marks: And you and I have been raising this point for two years. And it's just shocking to me that there's so many folks out there who are completely convinced that they know what the norm is. And you might find two different people who are completely convinced and have completely opposite perspectives on what the normal is in terms of the right to participate in a CV transaction, right, especially if it's a GP-led [deal].

John Arnold: And then, fundamentally, we've had disagreements with opposing counsel on exactly what constitutes a CV deal.

David Marks: And look, that's one of those things that, unless you have both good counsel and a good investment banker, if you're a founder, that is one of the most important terms that makes this different than how these deals have been done and the expectations for if you have rollover equity, when are you going to see the cash on that? That's one the biggest differences now versus the last 20 years or the prior 20 years because it might well be that you have to hold your equity for a lot longer. And I don't know that that's a bad thing. I mean, that might well be good for improving operations and incentives for good operations, but it's something that people have to really have a deep understanding of when they're choosing who they're going to partner up with.

Morgan Ribeiro: John, just to kind of close things out, I know we touched on this earlier about regulatory scrutiny and just the regulatory landscape right now, but in this current environment, sellers must really establish their credibility in terms of regulatory compliance, not only from sort of the scrutiny and headline risk for investors, but I think just establishing that confidence upfront and the integrity of their revenue per valuation. So what do founders need to consider prior to even going to market as it relates to regulatory compliance? And any differences in whether or not they are seeking a majority or minority investment?

John Arnold: Founders are often really growth-focused and will get to a point where they start to realize all right, now I need to bring in the compliance. And often when they're at that point, it's much more difficult and much more expensive to take care of that housekeeping and get their house in order from a compliance perspective. So it's much better to tackle that on the front end. Do you need a 100-page compliance manual with a compliance committee and a compliance officer if you're a small growing company? No. But what you do need are appropriate safeguards and protocols in place and a compliance program that is tailored to your business, the size of your business and the resources that you have available. It's always important to be thinking about those things in the front end rather than on the back end. When we see a compliance program or a bunch of compliance policies, procedures that have been put in place within 12 months of going to market, we don't give those much credibility. Great that you have them. What were you doing before that is what we care about. On the antitrust front, it's also something to think about depending on the sector you're in, size of your business. We have started to encourage clients to be thinking about keeping record and board minutes of having discussions about antitrust issues if they are getting to a certain size in the market to where it is part of the analysis, it's part of what they're thinking about, so that they can come back and reference those if they ever needed to.

Morgan Ribeiro: That's great. Well, I think that's an important note as we think about sort of these various structures that we've discussed on today's podcast and certainly where we're headed. I know we're heading up to the time here now, and I want to just, for some closing remarks. Are we going to see more of the same from 2025? Or what are your big predictions for 2026?

David Marks: Well, I'll start with the bull case, which is that if inflation stays tamed and the economy still improves, not just for the golden seven companies like Nvidia, but really for the rest of the market, I think that you're going to see a real resurgence of interest and strong interest and valuations. Even if it's not in traditional exits, we'll see a lot of these successful continuation vehicle deals with significant rollover by LPs, and/or just a lot of new entrants coming in and funding these. And I think a lot that's going to be driven by, hopefully, a recognition that there are real opportunities for operational improvements. The likes that we haven't been focused on, but the industry as a whole and patients are desperate to see. So, if you're bullish on AI, there's really not a better space out there than the provider space in terms of implementation of it and without having to pick a winner, you know. Now if inflation continues to rise and you see labor shortages, especially with some of the issues that we've seen in the other provider spaces, like hygienists, for example, in the dental space, I think it's going to increase the importance of a lot of the ecosystem around the provider space to deliver solutions in terms of cost management. I think there will be an even further focus on whether or not there's going to be revenue opportunities for revenue enhancement. And I think that a lot of the provider spaces and healthcare spaces that are dependent on consumer demand will get, you know, questions. So in the bull case, I think the areas like dental and med spa could be really, really interesting as reflections of just retail healthcare. In the less bullish case, I think those areas might really meaningfully differentiate based on platforms that have been able to successfully execute on a lot of the strategies and operational improvements and management improvements that Rahil talked about that Clairvest focuses on. Those will really meaningfully differentiate. I think we'll see pretty significant spreads in valuation between the good and bad players in the market.

Rahil Manji: I would second that. I think that's exactly where I was going to go, is where you ended. I think there's going to be a lot of, at least my projection, is that there's going to be a lot of really strong companies that focus on organic growth and recruiting, etc. over the last couple years when many have struggled that will come to light. We will come to market, and there'll be kind of a renewed optimism on, like, what's possible and what's been going really well in light of some more challenging market. And then I agree and I think we're seeing within our portfolio company of a lot of the AI discussion started early to mid last year and some of the, you know, fruits of that are going to start being really evident in operations, etc. across trying to provide our businesses, in my opinion.

John Arnold: Rahil, David, I think you're both on point. I think in terms of deal volume going into the year 2025, finish strong. We all have a lot of carryover deals that were closed in Q1. So I think Q1 is going to be setting the pace for the rest of the year. I don't know that it will be a record-breaking year, but I think it will be steady and definitely busier than 2025 was, just in terms of deal volume. I expect to see more strategic transactions and consolidation, especially on the services side. And health tech, AI, biopharma, those are all going to continue to be hot, I think, for the obvious reasons. But I think the bigger transactions that we see this year will be happening on kind of strategic deals.

Morgan Ribeiro: Awesome. Well, thanks everyone for your time today. This has been a fun discussion and look forward to talking soon.