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BFD Expert Voices - Health Tech Deals

BFD Expert Voices

This week we're talking behavioral health M&A with Rajat Duggal, a partner at middle-market private equity firm FFL Partners.

Why he matters: FFL sold its stake in substance use disorder business Summit Behavioral Care in 2021 to Patient Square Capital for north of $1 billion, and has been invested in Autism Learning Partners since 2017. 

Duggal's responses were lightly edited for clarity and length.

How are you navigating new investments and your own behavioral health portfolio, given reimbursement pressures and staffing shortages?

At FFL Partners, we are relying on our Sector Exploration and Expertise Development [SEED] process to identify attractive areas for investment within behavioral health that are showing resilience to some of the headwinds facing the industry. We identify subsectors with secular tailwinds supporting growth and less cyclicality, where FFL’s healthcare investment playbook can add value.

Labor supply was a key issue to address in many health care services deals we looked at last year. However, businesses that have established unique cultures and the ability to recruit and retain good talent really stood out.

In our own portfolio, we are working with our companies on better ways to recruit and retain talented professionals. Our operating partners have worked with several companies to understand the labor dynamics more fully within each market segment of the industry and instituted various initiatives through a test-and-learn approach.  

What subsectors within behavioral health are you most excited about? 

We remain focused and active in investing in the substance use disorder space as the growing national opioid crisis continues to require resources and innovative approaches to providing quality care to those affected. 

Another active SEED area for us is outpatient mental health, where we are focused on companies that are leveraging telemedicine and deploying differentiated recruiting and retention models to attract providers. 

Finally, across all the health care subsectors we are pursuing, we are focused on companies that are taking costs out of the system through innovative payor and provider models while improving overall patient health and experience.

The industry has recently been challenged in recruiting quality caregivers, which has impacted many providers. 

This is especially the case for smaller providers that don’t have the resources to invest in addressing these labor shortages that better-capitalized providers do.

While we expect near-term M&A activity to be muted as the industry recovers from staffing challenges, we do expect over the medium term that deal activity will pick up meaningfully. For example, we understand that Action Behavior Centers was recently sold to a sponsor at a full valuation. 

Given the state of debt and equity markets, is there more scrutiny on pro-forma figures when an asset is for sale?

Both buyers and lenders are focusing much more closely on pro-forma adjustments in the current economic environment. Whether it is de novo maturity adjustments, credit for acquisitions with letters of intent [LOIs] signed but not closed, or even run-rate cost adjustments, the terms in M&A transactions have become much more restrictive than 12 months ago. 

Lenders are particularly focused here, as some of the most aggressive pro-forma adjustments from the last couple of years didn’t end up materializing. This resulted in troubled credits where cash flows did not meet projections. 

1 big thing: Rajat Duggal of FFL Partners talks behavioral M&A

photo illustration of Rajat Duggal of FFL Partners surrounded by circles and abstract medical graphs

Photo illustration: Tiffany Herring/Axios; Photo: courtesy FFL Partners

Health care staffing company ShiftMed has raised $200 million in fresh funds, CEO Todd Walrath tells Erin exclusively.

Why it's the BFD: Health care staffing shortages are affecting patients' ability to get timely care, so investors are turning to tech-driven tools to help.  

Deal details: Panoramic Ventures led the raise with participation from Blue Heron Capital and Audacious Capital.  

ShiftMed is using the funds to more deeply integrate its technology with the scheduling tools of its health system clients and to hire more developers and marketing staff.

Walrath declined to specify the company's valuation or comment on when it might fundraise next.

How it works: McLean, Virginia-based ShiftMed offers an app for nurses to fill open shifts at hospitals, long-term care centers, assisted living communities, home care facilities, skilled nursing facilities and hospitals.

The company negotiates worker rates and splits the difference with health systems.

ShiftMed also offers health facilities the option of white labeling the app; workers can then use it to pick up shifts after hours.

Between the lines: ShiftMed's nurses work for the company rather than as independent contractors.

"We’re the only W2 provider in the hospital space," Walrath says.

"It’s bad for the health care system at large to have travel nurses that cost twice as much" as contractors, says Panoramic Ventures general partner and ShiftMed investor Paul Iaffaldano.

By the numbers: ShiftMed has 350,000-plus nurses and aides using its app in more than 110 markets across the U.S. and serves more than 1,500 enterprise health care partners, Walrath says.

Roughly a quarter of those people are community health workers, such as home health aides. The other 30% are certified nursing assistants (CNAs), while the remainder are split evenly between licensed practical nurses (LPNs) and registered nurses (RNs).

"We’re now a profitable company," Walrath says, declining to provide revenue figures. "Hopefully we won’t have to raise again."

2. The BFD: ShiftMed fills $200M raise

Illustration of a nurse walking with an elderly man.

Record levels of burnout and quitting among health care workers continue to rankle the health care field three years after the pandemic began. As a result, tech-forward staffing companies are grabbing investor attention:

Health care staffing technology company ShiftKey (not to be confused with ShiftMed) in January collected $300 million in a round that tipped the company's valuation over $2 billion.

Incredible Health, a career marketplace for health care workers, in August raised $80 million in Series B funding at a valuation of $1.65 billion.

Nurse staffing company IntelyCare in April landed $115 million in Series C funding at a $1.1 billion valuation.

State of play: Health care staffing

3. State of play: Health care staffing

Illustration of a person retrieving a newspaper titled "State of Play" from a mailbox.

NOCD, a Chicago-based behavioral health provider focused on exposure and response prevention therapy for obsessive-compulsive disorder, has raised $34m led by Cigna Ventures and 7wireVentures. Insiders Kaiser Permanente Ventures, F-Prime Capital, Eight Roads Capital and Health Enterprise Partners joined, along with new backer Longitude Capital. https://www.treatmyocd.com/

Doctify, a London-based health care review platform, has raised $10m led by Beringea and joined by Keen Venture Partners, Amadeus Capital Partners and Guinness Ventures. www.doctify.com

Simple HealthKit, a diagnostic delivery company, has raised $8m in Series A funding led by Initialized Capital with participation from seed investors Kleiner Perkins, Kapor Capital and Quest Venture Partners. https://www.simplehealthkit.com/ 

Zur Rose (SWX: ROSE), an online pharmacy, has agreed to sell its Swiss business to Migros subsidiary Medbase for roughly $394m. https://axios.link/3l8qXVC

Tivity Health, a Nashville, Tenn.-based provider of hybrid tools for adult wellness, has acquired Burnalong, a Baltimore-based developer of a fitness and mindfulness app. https://www.tivityhealth.com/

4. Deals o' the day

Ieso Digital Health has named former Humana VP David Icke executive chair. https://www.iesohealth.com/

5. It's Personnel

Situational awareness: The gang's all here. Health Tech Deals writers Erin and Aaron (plus editors Claire, George and Brad) are on the ground together for the first time to bring you this week's edition live.

One big favor: We're looking into additional topics to cover at Pro Deals, and we'd like your feedback! Tell us what you're interested in seeing from Axios Pro by filling out this short survey.

🎿 Erin finally ventured to a new ski resort and shredded a lot of fresh pow.

✨ Thanks for reading, and extra thanks to newsletter editor George Moriarty and copy editor Brad Bonhall. Please ask your friends and colleagues to sign up.

February 06, 2023

1 big thing: Rajat Duggal of FFL Partners talks behavioral M&A