When Stonehenge Partners invests in a business, it’s looking for operators who have skin in the game. This means, as a fund, it often finds the most opportunity through minority recapitalizations, says Managing Partner Andrew Bohutinsky.

Take, for example, its investment in MedVet, which the firm recently achieved liquidity for after the business grew substantially under its ownership.

The PE firm bought an initial minority equity stake, Bohutinsky says, which led to an additional, larger round of minority equity recap. The provider of specialty and emergency health care for pets did more than 20 acquisitions with the help of Stonehenge’s institutional capital.

One of Stonehenge’s focus areas is the health care space, such as its 2019 investment in Chicago-based Weil Foot & Ankle Institute, one of the nation’s largest podiatry practices.

“One key dynamic that we look for in these businesses is that the people who own the business are most often the providers — the doctors or the surgeons,” Bohutinsky says. “We want significant skin in the game for those people because they’re the ones driving the business. If they’re looking for 90, 100 percent liquidity, that’s not something we’re interested in. If they’re looking for 40, 50, 60 percent liquidity, those are the types of deals we really like.”

There’s less competition for this type of investing, as well.

“There are fewer funds that do minority deals. Most private equity funds want to buy majority. We really like, in the right situation, minority deals,” he says.

Bohutinsky shared more about Stonehenge’s investing strategy, including a detailed look at its purchase of Queen City Hospice, at the Smart Business Dealmakers Conference in September.

What attracted you to the Queen City Hospice deal?

Queen City is a good case study for growth through liquidity, which is something we see often at Stonehenge with the businesses that we invest in or we acquire.

Queen City Hospice is a hospice services business based in Columbus that’s nonfacility based, which we acquired in early 2018. At the time, it was owned by two individuals who had operations in Columbus and Cincinnati. One of the reasons we liked it was we thought there was real room for improvement in how to run the business.

The owners had combined the hospice business with a home health business, which we didn’t think was optimal. We liked either focusing on one or the other. We liked the hospice side better, so our plan was, once we acquired it, to just focus on hospice services.

One thing we love is when a really good operator has skin in the game, in this case, Jim Vannelle, who rolled all of his phantom stock into the deal. He is our partner as a minority owner of the business.

How did the deal’s structure affect the potential for long-term growth?

We did something that we like to do in situations where the business has a lot of growth potential. We structured the company for growth by utilizing a low amount of leverage, “over-equitizing” the deal. We provided all the equity coming in, but for Jim’s equity.

We like this structure because it provides us good breathing room for long-term growth. We can make investment in the business that may impact short-term profitability, but that long term are really good for the business. Day one, we started doing that. We immediately started investing in the business, focusing on adding and upgrading people, processes, systems.

What have been your results so far?

So far, all of these moves have paid off. Our patient census, in a little over a year, has grown over 100 percent, and more important, EBITDA has grown over 300 percent over that same time period. We now have No. 1 market share in Columbus, No. 1 market share in Cincinnati, and we’ve recently expanded in Dayton, which is a very fast-growing market for us.

In general, how should business owners decide whether to cash out entirely or leave chips on the table?

The first question is how much potential do you see for growth? That’s one of the reasons we like to see a big rollover, because people are voting with their pocketbook. If they roll over a lot, obviously, they believe in the future of the business.

And then second, who’s your partner going to be? That’s huge, because we all know of situations where it doesn’t work with a partner. So, check out your partner — who that might be, what’s life going to be like. Do your homework.

How much does control matter?

We don’t see a lot of difference sometimes between minority and majority transactions.

The group running the business, they control the business, because, for instance, like in our hospice business, we own the majority of that business, but we don’t run hospice businesses. That’s not our expertise. So, I would say that team actually controls the business, even though we have legal control of the business.

How much of a role does culture play in these transactions?

We’re looking at a business pretty seriously right now that is in a decent industry. Nice business, but we really like the culture of the management team.

The CEO owns a piece, but there are other members of the management team that came to us and said, ‘Hey, we’d like to invest, too.’ We love that, and it was clear to us over a number of meetings that this CEO has built a very strong culture and there’s a lot of opportunity because of that in the future. That got us more interested, and it raised our value.