Probiotics: A Growing Variety of Healthy Gut Punches, Gavin Daniels

By now, even the non-foodie, non-health nut crowd has heard of probiotics and some of the confusing new terms like “gut health” and “friendly bacteria.”  In a nut shell, nutritionists have realized that over the past 100 years, the packaged food and beverage industries became experts at processing, which helps shelf life and reduces food waste.  Refrigeration also become a key component of our elongated farm-to-factory-to-table supply chain.  Unfortunately, many of the elements being stripped out of our foods and beverages as a result of the evolution of food processing and storage have numerous health benefits, including improved digestion and an improved immune system. Countering this probiotic deficiency means loading up on probiotic products chock full of impossible-to-pronounce friendly bacterium, such as “lactobacillus acidophilus” and “streptococcus thermophiles.”  Early informed consumers simply looked for labels with “probiotic” on the front, but it was slim pickins.

Until recently, yogurt was the probably the most common probiotic-heavy food found in U.S. households, and probiotic benefits are one of the reasons yogurt has been a rapidly growing category (particularly Greek yogurt) in recent years.  After yogurt, and maybe pickles, foods high in probiotics might be difficult to find, difficult to eat, and difficult to pronounce.  Many Americans would have to Google Kefir, Natto, Kvass, Tempeh, and Kombucha to know these are things you put in your body, and not yoga poses.  In actuality, these are products people in Asia, Eastern Europe, and the Middle East have been consuming for thousands of years.

So what is the average American to do when confronting poor gut health?  A bun full of sauerkraut and no sausage? A bowl of kimchi? A dozen pickles?  Thankfully, for those looking to stick with their normal diet and improve their microbiome, a wide variety of new probiotic foods are hitting shelves, including:

A burrito, chips, root beer, and a chocolate bar – the new gut-healthy breakfast of champions!

Health Matters, Nouse, Current Temp of High-Tech Care

The healthcare IT (“HCIT”) market is expansive and dynamic. A cursory glance at 2017’s wealth of deals—from predictive analytics applications to cloud-based claims management solutions—illustrates HCIT assets’ immense value to both strategic and financial investors.

However, if you ask a doctor about on-the-ground technology implementation, you will likely hear a different story. The healthcare industry is notoriously slow to adopt emerging technologies. Some people even joke that the healthcare industry is 15 years behind the latest technology. Itamar Kandel, president at OrbiMed-backed TigerText, explains that this trend is due to a confluence of concerns surrounding two key factors: safety and workflow. Safety is intuitive. If things go awry with HCIT systems, people can die. Thus, providers must go to great lengths to test every potential flaw of every prospective solution. This demands a great deal of time and resources.

Workflow concerns require a bit of additional background. Kandel explains that rigid workflows are an integral tool for physicians because they must navigate torrents of work and deliver care in a “sliver of minutes. A deviation from an established workflow is risky and could be deadly, so the payoff needs to be significant.”

The state of electronic health records (“EHRs”), digital profiles of each individual’s medical history, exemplifies the consequences of workflow disruption. Healthcare providers have sought to optimize and standardize EHRs for the better part of the past two decades. Standardized EHRs promise to provide doctors critical information when it is needed most, a “significant payoff” in anyone’s book. Efforts to standardize EHRs, however, have yielded a status quo in which EHRs are bulky, consume a disproportionate amount of doctors’ time (see the exponentially growing medical scribe industry), and are not particularly transferrable. In other words, doctors’ workflows have been increasingly disrupted by a technology-enabled solution that has yet to bear tangible fruit. Situations like this serve to entrench a preference for tried-and-true best practices, not radical change.

Such roadblocks to change consequently create an HCIT environment marked by evolutionary, not revolutionary, change. Strategic and private equity investors in this space, then, stand to gain from investing in firms that apply technologies whose viability has been established in less-sensitive markets, like consumer technology, to healthcare’s information infrastructure. Recent consolidation in cloud-based healthcare applications, like HMS’s recent $170 million acquisition of Eliza Corporation, exemplifies this trend. When enterprise cloud solutions began to gain prominence in the late 2000s, healthcare providers responded with tepid interest because of the highly sensitive nature of their data and questions surrounding both uptime and connectivity. After several years of cloud technology refinement in both consumer and enterprise domains (that were not without high-profile failures), cloud-based applications have gained major traction with healthcare providers throughout the nation.

Today’s HCIT investment boom, then, is the manifestation of years of iterative improvements upon technological innovations, not the “move fast and break things” mentality often associated with information systems’ improvement. Investors are betting on firms that utilize established technologies to clear the healthcare industry’s high safety and workflow hurdles to deliver better outcomes for all parties involved. In the short run, that means few of the sci-fi innovations that crowd the media will be commonplace in health systems’ technology infrastructure. In the long run, though, AI-enabled assistants may be as ubiquitous with practicing physicians as pagers were 20 years ago—as long as their shortcomings can be quickly and concretely worked out in consumer markets first.


Enterprising Ideas, Briton Burge, Marketplace for Marketplaces

While investment banks help facilitate a marketplace for Mergers and Acquisitions (“M&A”), an interesting meta-trend has developed in the rise in M&A around marketplace platform companies – a marketplace for marketplaces.  What began as a novel means for individuals to trade miscellaneous goods online, has transformed into a diverse ecosystem of platforms, trading an increasingly complex set of assets.  This shift has attracted significant capital to start-ups and existing platforms in search of the next frontier in online trade, and the possibilities seem endless.

Marketplace businesses play a unique role in the eCommerce landscape, ranging from payment processors to digital storefront providers. These types of businesses are attractive investments for a number of reasons:

  1. Marketplaces are uniquely positioned to control a large portion of the entire payment stack. They have touchpoints with both buyer and seller, operate the payment platform, often act as the payment facilitator, and control which payment gateways are used at favorable terms.
  2. Marketplace businesses can enjoy the benefits of both recurring revenue and transaction-based revenue. While customers are typically not contracted like traditional SaaS businesses, established marketplaces create sticky relationships with both buyers and sellers. Additionally, while SaaS businesses constantly need to acquire new customers to achieve growth, marketplaces can leverage upside in their existing customer base as users ramp up and increase transaction sizes.
  3. The business model benefits from ecosystem-driven demand. As long as there is supply and demand for a good, whether it’s hard goods, consumables, services, jobs, or something else, there will be a place for marketplaces.
  4. Marketplaces enjoy the widely desired network effect – as more and more people use the platform, they become more valuable. This creates unique opportunities to scale marketplace businesses, putting them in highly defensible market positions.
  5. Online platforms are highly profitable. While traditional trade tends to require large investments in infrastructure, online marketplaces operate an “asset-light” model and are able to rapidly scale margins as they grow.
  6. As a younger generation of business leaders takes the helm within “old-world” industries, online marketplaces are increasingly disintermediating traditional trade for B2B transactions, increasing the size and scope of what is being transacted through online platforms.

Though it’s hard to compete with long-established horizontal marketplaces like eBay, Amazon, or Craigslist, several companies have carved out niches and created a vertical marketplace on top of it. Examples of this include: OpenTable (restaurant reservations), Airbnb (temporary housing), TaskRabbit (freelance services), and EnergyNet (oil and gas).

MHT Partners recently sold EnergyNet, which exhibits all of the characteristics mentioned above. Marketplaces may come in many shapes and sizes, but MHT believes that the marketplace trend will continue to increase in popularity amongst investors as companies continue to find innovative ways to connect demand with supply.

Learning Curves, Bonny Gammill, Going Beyond the Scores

Approximately 2.7 million high school students took 4.9 million Advanced Placement (“AP”) exams this past May(1). Millions are investing hundreds of hours into classes and paying $93 per AP exam in the hope of 1) gaining college-level credit without paying the university price, 2) bolstering college admissions applications with high scores, and 3) boosting high school GPAs with added AP weighting. With 86% of the top 153 colleges and universities restricting AP credit use(2) and college admissions officers saying ‘it depends’ for impact on acceptance, millions of students and parents are left wondering if the extra preparation is truly worth the effort.

AP courses allow students to take college-level courses in a high school class setting. By taking a nationally standardized end-of-course exam that is scored on a 5-point scale (1 = “no recommendation” to 5 = “extremely qualified”(1)), students who achieve scores >=3 may be able to count these test scores as completed coursework at their future college or university, potentially saving thousands of dollars and hundreds of hours.

One significant issue with this plan is that the majority of colleges and universities restrict use of AP credits, in the form of capping the amount of AP credits or denying the use of AP credits towards a student’s degree progress(2). Despite that the transferability of AP credits to college varies widely, the benefits of AP coursework go beyond earning credits early; rigorous high school curriculum prepares students for success in college.

Several studies demonstrate that adding academic rigor to high school students’ regular curriculum is positively correlated to college success(3).  A recent study by The College Board found that overall, AP students who scored >=3 on at least one AP Exam, compared to those who scored lower or do not participate, were more likely to succeed in college based on several factors. Students with AP scores >=3, are estimated to achieve the following compared to their nonparticipant peers* (3):

  • Four-year graduation rates that are 11.1%-11.5% higher
  • First year college GPA that is 0.15 (on a 4.00 scale) higher
  • Probability of four-year persistence (consistent college enrollment) is 5.3% – 7.8% higher

The benefit is twofold. First, the applicability of the AP coursework gives students an advantage with the subjects taught in college. Second, the challenge of AP exam preparation (in comparison with standard high school coursework) prepares students for the more challenging academic environment presented in college.

* Nonparticipants includes students enrolled in neither the AP Program nor a dual enrollment program.

Differences in Predicted Probabilities of Four-Year Graduation(3)

So how do students get the best of both worlds – college credit and the tools for success?

  1. Research: Students can research their potential colleges and universities to see what forms of pre-college credits are accepted.
  2. Prioritize: Studies show that students who score >=3 on their AP exams have higher likelihood of success than those who score below. Scores of >=3 have a higher potential of being transferrable college credits. In addition, admissions officers may pay more attention to AP exams related to a student’s desired major.
  3. Personalize: Students can personalize their learning by addressing academic strengths and weaknesses early in preparation. Hiring an educational counselor is one way for students to access personalized learning and optimize college preparation.
  4. Seek Alternatives: There are other options to the AP program, such as dual enrollment programs, the International Baccalaureate Diploma Program, and high school honors-level classes that can add rigor to standard high school academics.

Success in college requires a delicate balance between skill, effort, and time management. Balancing a typical high school course load with the AP program is no different. The jump-start to college subjects and life lessons learned from academic consistency in earlier stages of education pay dividends that go beyond good AP scores, but ultimately into the college classroom and across the graduation stage.


(1) “2.7 Million Students Expected to Take Nearly 5 Million AP Exams in May.” The College Board, 16  Apr. 2017,

(2) Grant, Kelli B. “Study up: Getting AP Credit for College Isn’t Easy.” CNBC, CNBC, 4 May 2017,

(3) Wyatt, Jeffrey N., et al. A Comparison of the College Outcomes of AP and Dual Enrollment Students. The College Board, 2015, A Comparison of the College Outcomes of AP and Dual Enrollment Students.

Health Matters, Krause and Khan, What Makes a Specialty Physician Practice Attractive to Private Equity Groups

2017 has been yet another active year for private equity (“PE”) investment in an array of specialty physician groups. Specialties like dermatology, dentistry and emergency medicine have remained at the forefront of PE investment, while others like orthopedics are increasingly emerging as key future investment opportunities for PE. There are a number of traits that make these practices and their specialties conducive to the PE investment model.

Chief among those reasons is the opportunity for value creation by combining several smaller practices into a single platform in a strategy commonly referred to as a “roll-up.” Core to a successful roll-up strategy is a fragmented market with ample partnership opportunities, which certain physician specialties provide in spades. For instance, dermatology is a highly fragmented market place with 73% of ~ 14,000 practices employing less than 5 dermatologists and 29% employing only one.1 Moreover, Advanced Dermatology & Cosmetic Surgery and Forefront Dermatology, the two largest players in the space, account for only 2.3% of the specialty’s market share in aggregate.2 Physician practices achieve cost reductions through the consolidation of core administrative functions like finance, accounting, human resources and compliance. Physician practices may also gain greater negotiating power with payors once a practice has amassed a high density in a certain geography, leading to better contract terms.

Certain physicians’ groups also provide the opportunity to launch new services and products that can create new cash flow streams for the practice. These ancillary services can be everything from cosmetic products or pathology lab services at a dermatology practice to surgical procedures provided through an ambulatory surgery center or orthotics sales at an orthopedic practice. The successful introduction and execution of these product lines leads to increased profitability of the overall practice and an increased diversity of revenue, both traits that private equity firms value highly.

On a practice level, several business characteristics undoubtedly garner outsized interest from private equity firms. A platform investment is primarily defined by its scale and infrastructure to support future growth. Typically, ideal platform candidates will be practices with multiple physicians and extenders, a robust back-office infrastructure, a strong management team and in-network contracts with all major commercial payors. These attributes will allow the private equity partner to execute on a strategy of acquiring and integrating several other smaller practices in an efficient manner, creating revenue and cost synergies. Notably, some physicians prefer to join multi-physician sites granting them quicker access to income, an established infrastructure and fewer administrative responsibilities.

Ultimately, specialty physician groups will garner significant interest from the PE world for the foreseeable future as the sector continues to be ideal for private equity value creation.

1 “Market Profile of U.S. Dermatologists.”
2 Oliver, Kelsey. “Dermatologists: Market Research Report.” Dermatologists Market Research | IBISWorld, IBISWorld, 24 Oct. 2017,

General M&A, Craig Lawson, “Q of” What?

Middle market M&A transactions oftentimes require the production of a report called a “quality of earnings” analysis. Most people, businesspeople or not, have never heard of this, and business owners, upon hearing that they will need one conducted, often have the response that is the title of this article. So what is a quality of earnings report, or “Q of E” in shorthand? In simple terms, it’s an analysis performed on a business’ financials to ensure that the financials were assembled appropriately from a Generally Accepted Accounting Practice (“GAAP”) perspective and equally as important, to ensure that from an analytical perspective (which can be different from an accounting perspective) the financials are telling the appropriate story about the state of the historical financials. In the context of an M&A transaction, there are a couple things of note regarding Q of Es.

  1. Many middle market businesses (especially those that are owned by founder / entrepreneurs versus private equity firms) do not have audited, or even reviewed, financials.  As such, the Q of E, while not explicitly intended as a substitute for an audit or a review, is oftentimes the first “professional financial review” a business has ever received.  As such, inevitably, some inaccuracy is uncovered and as we investment bankers like to say, “forewarned is forearmed.“  In other words, while we can’t turn back time and necessarily correct an inaccuracy in the past, we can, however, identify it upfront and devise a strategy to explain or mitigate against it as all sophisticated potential buyers will, in all likelihood, identify the same inaccuracy
  2. A Q of E report is oftentimes oriented around defining the true Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) for the last 12 months (“LTM”).  LTM EBITDA is a common financial metric around which many middle market businesses are valued. Moreover, EBITDA is not a GAAP accounting term and as such, even if the company is audited or reviewed, you will not find a line item labeled “EBITDA.”  Additionally, company audits and reviews are conducted around the fiscal year end. Most M&A transactions do not occur entirely in line with the fiscal year end such that an LTM view is oftentimes more up to date than the last audit or review.
  3.  Particularly when private equity is the presumed acquiror or investor in a business, they will oftentimes deploy debt (or “leverage”), in addition to their own equity, to fund the investment (the “L” in “LBO” stands for “leverage”).  Lenders, particularly traditional chartered commercial banks, operate in highly regulated environments and as such, require volumes of documentation and representations of accuracy.  A Q of E is required by most lenders.

Q of Es have long been required by buyers of or investors in businesses (particularly when they are PE firms).  Given the above, we, as investment bankers, are increasingly suggesting that our clients commission their own Q of E before entering the market. A nationally recognized, reputable accounting firm can produce a Q of E anywhere from $50,000 to $75,000. While the Q of E is a real cash expenditure, it will be treated as an addback to EBITDA.  More importantly, the benefits of being proactive on the Q of E front provide several large advantages as the M&A process unfolds in that it allows for the buyer to more expediently move through their due diligence and again, “forewarned is forearmed.”  Sellers hope to be viewed as good investments, and in turn, the Q of E is a good investment to help ensure that.