Private Equity as an Exit Opportunity for Medtech Firms

With spring in full swing, medtech business owners thinking about selling may be curious about the current buyer landscape. Let’s begin by stating the obvious: Potential purchasers could include industry strategics, which may be a competitor. While these buyers could produce interesting results for business owners and stakeholders, there are numerous dynamics at play that can impact the outcome. Those dymanics, however, are far too complex to mention in passing here; they warrant their own column.

If an industry competitor or strategic is not in a shopping mood, there still are options for potential sellers. One of those options is individual “champion” buyers—i.e., career executives who want to run their own business. But these buyers rarely have enough money to outright purchase a company on their own so they will frequently turn to a financial backer—often private equity (PE)—to gain financing for a deal.

Interestingly, many industry competitors/strategics are now owned by a PE firm. These firms have been very active lately in acquiring medtech and healthcare-related companies. Recent examples include TPG Capital’s $1.4 billion purchase of healthcare IT firm Nextech (July 2023); Exor NV’s $2.8 billion bid for a 15% stake in Koninklijke Philips NV (August 2023); Ephios Luxembourg’s $1.3 billion buyout of German laboratory operator Synlab (September 2023); RoundTable Healthcare Management’s acquisition of pressure injury prevention and patient positioning solutions provider EHOB (January 2024); Oberland Capital’s $320 million investment in immunotherapy developer ImmunityBio Inc. (January 2024); and Thomas H. Lee Partners’ $2.5 billion offer to take medtech services provider Agiliti private (February 2024).

Such heavy PE-driven inorganic activity in the healthcare industry has triggered a number of concerns from potential sellers about private equity patrons. The primary concern is that financially driven buyers for healthcare service companies may tend to drive up healthcare costs because their activities to consolidate healthcare (i.e. hospitals, doctor’s practices, etc.) may lead to anti-competitive behavior.

The inclusion of financially driven buyers (i.e. PE firms) creates opportunities due to their involvement as a possible exit strategy for medical device companies. This benefits potential sellers too, as it increases the pool of possible buyers.

While these PE groups create opportunities, some sellers have limited knowledge about this pool of possible acquirers. Therefore, it’s important to better understand this group of buyers before beginning an exit process. Some of the knowledge needed by sellers encompasses (1) PE buyers’ identities; (2) the different types of PE buyers and financial funds; (3) PEs’ organizational structure; and (4) whether or not they make the best buyers. A detailed examination of each PE concern follows.

Private Equity, Explained

As defined in Investopedia, “…private equity is ownership or interest in entities that aren’t publicly listed or traded. A source of investment capital, private equity comes from firms that buy stakes in private companies or take control of public companies with plans to take them private and delist them from stock exchanges…” Put simply, PE firms use their own sources of capital to buy other businesses.

The Assortment of PE Buyers and Funding

There are several types of PE firms including search funds, sponsored groups, lower middle-market funds, large funds, and hybrid firms with multiple funds.

Search funds are often simply an individual (or a small group) intent on purchasing a business. These buyers usually have established credibility with financial backers from other PE categories who act as their primary funding source for deals. Sellers negotiating with search fund buyers should request confirmation of financial support before executing a letter of intent (LOI) that would lock them (sellers) into an “exclusivity” situation.

Sponsored groups are similar to search funds, as they also rely upon others for financial backing. However, the main difference with these buyers is they typically have assured financial backers to “sponsor” their deals. And while a sponsored group likely will have the necessary financial backing to close a deal, it nevertheless is still important to confirm a sponsored group’s committed financial resources before signing a LOI.

Lower middle-market funds are typical PE groups that solicit and obtain pools of money from investors. Those pools of money are called funds that come with basic spending guidelines. For example, many lower middle market funds will raise between $100 million and $700 million to purchase businesses. Buyers in this category often will pursue potential acquisition targets by theme, which they call a “thesis.” A thesis can quickly morph into a mandate, such as “looking for medical contract development and manufacturing organizations located in North America with an EBITDA greater than $2 million.”

Large funds behave similar to the lower middle-market funds with the obvious exception of size. These PEs often raise funds in the billion dollar range so their wish lists typically are limited to businesses with an EBITDA greater than $5 million or $10 million.

Hybrid funds combine both large and lower middle-market financing. With hybrid PE, one fund may target smaller businesses with an EBITDA greater than $2 million while another fund pinpoints companies with an EBITDA larger than $5 million.

PE’s Organizational Structure

Private equity has various levels and positions that nurture the firm’s health, structure, and overall deal flow strategies. Equity firms are usually managed by a hierarchy that begins with analysts or interns, and tops out with partners. 

PE Roles and Responsibilities

Analysts and associates are a PE firm’s foundation. Their sole purpose is to help manage the many different streams of work within the firm. Keep in mind, however, analysts and associates have no decision making authority—they exist simply to support the firm’s internal financial decision-making.

Vice presidents are typically the next rung up from an analyst or associate. A vice president usually has an MBA, and is given more responsibility in the areas of sourcing and deal execution. But they are often not a part of the firm’s “investment committee”; thus they’ll likely need approval for anything they represent about valuation interest, etc.

Principals are the next most senior role. The workers in these positions are evaluated for their ability to find promising acquisition targets and close deals. Principals help manage and execute company portfolios and they may also participate in the investment committee, making them a reliable source when extending a deal offer.

Partners are above principals. Depending on the type of PE firm, though, partners may specialize in different areas. Case in point: Operating partners focus on portfolio operations for the firm’s management while investment partners concentrate more on investment activities. An equity organization’s chief financial officer or chief operating officer can also be considered partners or operating partners. Investment partners spend most of their time fundraising and representing the firm. Operating partners, on the other hand, use their industry expertise to help assess the future market opportunity for a deal.

Managing partners are at the top of the order, responsible for a PE firm’s operations and financial returns. More often than not, they are usually the person in charge. Once a managing partner takes interest in an M&A deal, it’s all but guaranteed to close at a very good value.

Which PE Group Is the Best Buyer?

It depends. Based on our deal-making experience, we have found that including PE buyers in the M&A process (on behalf of seller clients) will help ensure a competitive process. Whether the final purchaser is an industry strategic or another PE firm, involving multiple healthcare-focused PE groups positively benefits the exit valuation for stakeholders. Before accepting any deal, however, sellers should confirm a PE buyer’s financial ability to execute a mutually agreed upon valuation.

One last note: The best PE bidders often are the ones who involve their “operating advisors” or “operating partners” in evaluating the opportunity. If the operating executives believe in the market opportunity, they will fight hard to push a deal forward. Additionally, these operating executives will make a seller’s involvement with a PE firm easier since they will likely understand the targeted business better than a financial analyst with no operational experience. Happy dealmaking! 

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Florence Joffroy-Black, CM&AA, is a longtime marketing and M&A expert with significant experience in the medical technology industry, including working for multi-national corporations based in the United States, Germany, and Israel. She currently is CEO at MedWorld Advisors and can be reached at [email protected].

Dave Sheppard, CM&AA, is a former medical technology Fortune 500 executive and is now focused on M&A as a managing director at MedWorld Advisors. He can be reached at [email protected].