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BFD Expert Voices - Health Tech Deals

BFD Expert Voices

This week Aaron spoke with Francisco Partners partner Chris Adams on how he sources — and wins — carveout deals.

Why it matters: Sponsor-to-sponsor M&A activity has slowed significantly, but private equity is finding deal opportunities in strategic divestitures.

How does Francisco Partners' approach to corporate carveouts differ from your peers?

"If I think about most of our carveouts, they're businesses that we looked at years and years ago — often looked at before the current corporate owner had bought them. And so if the time ever comes when that corporate parent thinks, 'This is no longer strategic, or doesn't fit with where I'm going now,' we don't have two months or three months or six months of history, but we have five years or 10 years of history.

I think longevity in this space is a part of this. If you're a big corporate parent selling what is, for you, a small division — even if it's a big business for us —  there's a lot of things that go into that that aren't just price. For example, you probably still have shared customers that you're going to have in that division for a long time. There's going to be some brand transition most likely of some kind. How you treat those employees that were former employees of the corporate parent who are going to be go-forward employees of your company matters a lot."

What does FP's carveout pipeline look like for the rest of this year?

"With any deal, it's super hard to know until like you actually sign on that dotted line. And the same is true — probably even more so — with carveouts. There tend to be more decision-makers at the corporate that get involved and people can change their minds at the end. So the pipeline is super promising, but you never know until you know.

If you go back to the beginning of COVID ... there was a big wave of both investor interest but also M&A and strategic interest in health care tech in 2020 and 2021, where it was almost like, 'No price is too high  ...' and so a lot of people entered health care that hadn't been in before.

A lot of times when that happens a year or two later, people then realize, wow, health care technology is a little bit different. ... There's still long-term tailwinds that are going in health care technology. And so sometimes corporates are like, 'Well, there's still a good tailwind, we'll eventually figure it out.' But what has happened in past cycles, and you see certainly some of it happening now, is people saying, 'This is just different from what I'm good at. And so I'm not the best owner for this business.'"

Do you feel pressure from LPs to return money to them through an exit? Has your playbook changed with many sponsors still on the sidelines while debt remains expensive?

"Our investors are, I think, very patient and smart and don't need us to do anything unnatural to have capital come back to them sooner or in unnatural ways.

The past 15 years that we've been in health care have almost always resulted in a strategic looking to invest in our health care companies. So I wouldn't say that really changed lately."

1 big thing: Francisco Partners' Chris Adams talks carveouts

portrait of Chris Adams of Francisco Partners surrounded by circles and binary code

Photo Illustration: Tiffany Herring/Axios, Photo: Courtesy Francisco Partners

Value-based kidney care provider Strive Health raised a $166 million Series C.

Why it's the BFD: Triple-digit, later-stage funding rounds are few and far between in today's market — particularly deals that came to market this March, Axios' Claire Rychlewski writes. 

Details: The round was led by existing investor NEA alongside five new investors, including CVS Health Ventures.

Additional investments came from existing strategic investors including CapitalG (Alphabet), Echo Health Ventures, Town Hall Ventures, Ascension Ventures and Redpoint.

Strive doesn't anticipate needing to raise again for several years, and CEO Chris Riopelle says the company is on a "clear path" to profitability, declining to disclose financial details.

What's next: Strive will continue its organic growth efforts, with no plans to make acquisitions in the near term, Riopelle says.

How it works: Strive works with payors, health systems and physicians to offer value-based, tech-enabled kidney care.

The company serves 80,000 chronic kidney disease and end-stage kidney disease patients across 30 states.

Strive partners with more than 600 nephrology providers across 10 states.

Zoom in: Oak Street Health, which CVS moved to acquire for about $10.6 billion this year, is one of Strive's customers — and CVS' investment will further deepen that relationship, says Riopelle.

CVS also recently acquired Signify Health, a home assessments business. While Strive has no plans to integrate its services with Signify's at the moment, "we certainly will, where we can find synergies together," he adds.

What they're saying: "I think there is an opportunity for consolidation of sorts," says NEA co-president Mohamad Makhzoumi, citing the Fresenius-InterWell-Cricket joint venture formed last year as one example. "But I think that our expectation is that the organic story here is just so compelling."

Makhzoumi says the shift to value-based care and new payment models for kidney care from the Center for Medicare & Medicaid Innovation represent strong enough growth tailwinds without pursuing acquisitions.

"We have more than a $6 billion pipeline of opportunity in front of us," says Riopelle.

Context: Strive initially set out to raise $100 million but came away oversubscribed, Makhzoumi says.

"By the way, this was in March," he says.

The intrigue: Riopelle and Makhzoumi believe Strive could be an eventual public markets play when the economy improves.

"We're barely scratching the surface on this," says Riopelle. "The patient population certainly has the hallmarks of something big enough, in terms of scale, to be very successful as a public company, but also given that it's a big space and there's a few winners in it."

Makhzoumi cites NEA's typical decade-long hold, noting the firm is about halfway through that period with Strive.

"It's candidly one of our most exciting companies across the health care board technology given the impact they're having and how quickly they've managed to build a really valuable business," he says.

Editor's note: This story has been corrected to show that among the additional investors is Echo Health Ventures (not Echo Ventures).

2. The BFD: Strive Health raises $166M Series C 

Illustration of a saline bag solution with money as the liquid in the bag. 

Technology-enabled kidney care has drawn significant dollars, particularly from strategics.

Monogram Health, which Riopelle cited as one of Strive's competitors, raised $375 million in Series C funding in January — also led by CVS, alongside Humana and Cigna.

Somatus raised $325 million in Series E funds in early 2022, with participation from Optum Ventures and Elevance Health (fka Anthem).

3. State of play: Tech-enabled kidney care

Illustration of sticky notes overlapping that say State of Play

• Carrum Health, a value-based health care company for self-funded employers, raised $45m in Series B funding led by OMERS Growth Equity, with participation from Revelation Partners and existing investors Tiger Global Management, Wildcat Venture Partners, Cross Creek and SpringRock Ventures. https://axios.link/43h0ENY

• Hyro, a New York City-based developer of conversational AI tools for health care and enterprise, raised $20m in Series B funding led by Macquarie Capital with participation from new backers Liberty Mutual Strategic Ventures, Black Opal Ventures and K20 and insiders Hanaco Ventures, Spero Ventures and Mindset Ventures, bringing the total financing to $35m. https://www.hyro.ai 

• Ardian invested €100m for a minority stake in French veterinary clinic chain Mon Véto. www.veterinaire-monveto.com

• Trinity Hunt Partners acquired a majority stake in Centricity Research, a Columbus, Ga.-based clinical research network. www.centricityresearch.com

4. Deals o' the day

• Matrix Partners named former Amazon Pharmacy exec and PillPack founder TJ Parker general partner, per Bloomberg. 

• HealthX Ventures named former Define Ventures head of partnerships Kristi Ebong partner. 

• Main Street Health named former Circulo Health practice manager Michelle Vergona clinical market manager.

• Collective Health named former Medica chief analytics officer HungChing Chan its chief analytics officer.

• .406 Ventures named former Takeda Digital Ventures investment manager Rebecca Redfield associate.

• Company Ventures named former Redesign Health managing director Mark Rosenblum partner.

5. It's Personnel

🤝 Senate Finance plans health care mergers hearing — Axios Pro Health Policy

💊 Court ruling casts long shadow over future opioid lawsuits — Axios 

6. Your daily dose

Illustration of a Axios brand medicine bottle that says "your daily dose" next to a spoon.

Situational awareness: Erin is in San Francisco tomorrow moderating a panel on the future of health care with the leaders of Ōura, Trial Library and Next Ventures.

📺 Claire is giving her thinking brain a break to watch tonight's second reunion episode of "Vanderpump Rules." 

✅ Thanks for reading, and extra thanks to newsletter editor Claire Rychlewski and copy editor Mickey Meece. Please ask your colleagues, friends and family to sign up.

May 31, 2023

1 big thing: Francisco Partners' Chris Adams talks carveouts