Successful private equity investors take the time to zero in on the right investment rather than being forced into a decision fraught with risk, says Troy Phillips, a partner at Beecken Petty O’Keefe & Co.

“There are no called third strikes,” Phillips says. “If you don’t have absolute conviction, you’re better off looking for something else, versus trying to make something happen when you’re not convinced. When I look back at investments that have not gone well, they were instances where I probably didn’t have the conviction I should have had when I made the decision. You don’t have to invest in every opportunity you see.”

BPOC specializes exclusively in health care, investing in middle-market buyout transactions, recapitalizations and growth platforms. Since its inception, the Chicago-based firm has raised four funds with aggregate capital commitments of over $1.3 billion. 

“Health care is obviously a very broad industry, but underneath that health care banner, there are dozens and dozens of subsectors that can move somewhat independently of one another,” Phillips says. “You have to get down to that subsector level to really evaluate a potential investment.”

In this Dealmakers feature, we spoke with Phillips about dealmaking in health care and the impact a recession could have on M&A activity in the sector.

Study the market

A good starting point for an effective health care investment strategy is to assess the local and regional dynamics at play within a particular market. And doing so can be quite complex.

“In one market, there may be a dominant health system that has all the power,” Phillips says. “Are you competing with that system? In another market, there could be a very dominant payer. You either contract with that payer and have a good relationship, or you don’t, and that payer has the ability to more or less dictate reimbursement.”

Geographic diversity is another variable to evaluate.

“Depending on the size or scale of the business you’re starting with, you may be concentrated in one or two markets to begin with,” Phillips says. “You really have to look at both the subsector level and the regional geographic influences for any business, rather than just take a high-level national or macro point of view on an investment opportunity.”

While there is a level of complexity that comes with health care investing, it’s also a sector in which consumer demand is rarely a concern.

“There is a stability in the demand for the services or the products that doesn’t necessarily correspond with other areas of the economy,” Phillips says. “I’m not going to tell you that health care is recession resistant, because a recession does have an impact on health care. But it’s much more muted than an industrial or cyclical business. To some degree, you’re also arguably taking less macro risk in health care, which may justify the complexity if you look at it overall on a risk-adjusted basis. In a recession, you’re more likely to see people defer care. But at some point, they’re still going to need care.”

Consolidation is trending

In health care, consolidation has been one of the most common transaction types in recent years.

“A lot of the investments we’re seeing, in particular in the physician space, are about rolling up or consolidating specialties, whether it’s ophthalmology, dermatology, dental or veterinarians,” Phillips says.

With the presidential election coming up in 2020, speculation is rampant as to the potential impact on the economy and dealmaking.

“Regardless of who the Democratic nominee is, there is going to be a continued discussion around Medicare for all or Medicare buy-in and increased involvement by the federal government in health care,” Phillips says. “There is a possibility that puts a chill on health care dealmaking in 2020. We’ve seen that typically happen in an election year, but I’d say it's become more muted over time as there’s so much capital out there.”

Look beyond the numbers

For effective health care dealmaking, consider not just the financials and profit potential of a deal, but the very reasons these businesses exist in the first place.

“We are not going to invest in businesses that don’t prioritize top-of-the line care and make caring for the patients the primary consideration,” Phillips says. “We expect that of our management teams. Two, the businesses need to contribute to the overall health of the system, meaning that they’re looking to reduce costs or deliver improved outcomes. Businesses that have found a niche within health care where they can extract outsized profitability, whether that is pushing supplies on people or maximizing benefits for the bottom line of the company, those are not businesses that we would invest in.”