Healthcare IT Industry Spotlight Interview, Part 1: Casey West, Managing Director, SSM Partners

Tell us a little bit about SSM Partners (a Memphis-based private equity firm focused on Software & Technology, Internet & Consumer, and Healthcare). What attracted you to the firm?

I joined in 2004, shortly after business school. It was a dream of mine to do this type of investing in the Southeast, and that’s what SSM let me do. SSM has been a great small firm for many years and a leader in this part of the country, and I am very happy to be a part of that. We have a culture that distinguishes us. Our founder imparted a service orientation many years ago, and that fits really well with the way that I view the world and the way that I think about business. Getting to brass tacks, though, we’re a growth equity firm that invests in technology companies all over the country, so while we are located here [Memphis, TN], we are not limited geographically. Our market split is about 50-50 B2B technology to healthcare, and I am solely focused on the healthcare sector.

How does healthcare fit into SSM’s investment thesis?

Our healthcare activity began more than 20 years ago. When we started investing in healthcare, it was in the services sector, where there was a lot of healthcare innovation in the 90’s. HCIT was pretty nascent at the time. I would argue that we have sort of mirrored the industry. We have done less and less services investing and more and more HCIT through the years. For the last 10 years, we have done almost exclusively HCIT.

When you are evaluating HCIT companies, what are some of the most attractive characteristics or most important investment criteria that you consider?

There is a stratum of characteristics that apply to our portfolio companies inside and outside of healthcare. Those are basic things like strong management teams, attractive gross margins, happy customers and so on.

At a healthcare-specific level, a common phrase is the “triple aim”: lowering costs, improving quality, and providing a good user experience. Frankly, many of the big ideas to come out of HCIT have been in and around that triple aim concept. That said, I also think that there are some pitfalls in the triple aim. It is incredibly difficult.

At SSM we really value a few other things. First and foremost, we value a “hard dollar ROI.” That means an ROI that is objective. When you can credibly point to efficiency improvement, ideally significant efficiency improvement, from the adoption of a technology, as opposed to something that may be a bit more subjective, that is of first order of importance to us. A lot of HCIT firms offer “soft dollar” ROI where you have to do some work to connect the dots in terms of added efficiency.

In HCIT, we also pay particularly close attention to psychological factors and behavioral modification. If any part of the product is predicated upon the user significantly changing their behavior, we really study that. Historically, it has been notoriously difficult to overcome behavioral standards and patterns through the use of technology in the clinical setting. For any company to break into a given market, the returns have to be significantly greater than incumbents or competitors, sometimes greater than 10x. You need an excellent ROI to encourage change, and that is something that we look for in the companies in which we invest.

Interview to be continued in next week’s blog.

How Net Neutrality May Impact Medium and Small U.S. Businesses

You may have heard a lot about “net neutrality” over the last few months.  It’s a regrettably dull term for an important idea – should Internet Service Providers (ISPs) such as Comcast, AT&T, Verizon, and others be able to charge users different rates based on the amount of bandwidth used or should high-speed internet access be treated as a public utility?

Large technology companies such as Google (YouTube), Facebook, and Netflix are understandably against net neutrality since these companies require large amounts of bandwidth to deliver content to consumers efficiently.  An increase in cost or decrease in bandwidth could have a strong impact on the profitability or the performance of their content and services of these technology behemoths if they choose not to pay.  On the other side of the argument, we have the ISPs who are the gatekeepers of the internet via DSL, cable, and fiber-optic lines, and control how fast users surf the web and how quickly websites load.  ISPs would like to ‘de-regulate’ the internet in order to charge variable fees based on usage, stating that large technology companies don’t pay their fair share.

So, the million-dollar question is how the repeal of net neutrality will potentially impact the vast number of medium and small U.S. businesses?  The truth is, it’s hard to say, since some think the market will self-regulate- ISPs will play fair because they don’t want to annoy their customers and lose business, while others believe ISPs could increase the costs associated with accessing the internet by charging businesses significantly more for better service or to access a company’s target audience.  As a result of significant M&A activity over the past decade, the five largest ISPs account for over 75% of all wireline households in the U.S., so there is reason to believe the largest ISPs have little incentive to self-regulate.

If costs increase, all businesses, including medium and small U.S. businesses, could be stifled if they’re not able to pay for top-tier bandwidth access.  Smaller, tech-enabled internet businesses would certainly be affected as they compete with the massive budgets of the largest technology companies, which could undoubtedly afford to pay for top-tier service.  But even small businesses who process online orders through dedicated websites or that depend on cloud-based data centers could be affected.  In a sense, the repeal of net neutrality could increase the costs of doing business on the internet, and small-to-medium-sized businesses may be the most vulnerable to this change.

The open internet has provided many smaller businesses with a fair playing field, which could change now that the Federal Communications Commission (“FCC”) has repealed net neutrality.  Alternatively, the FCC has stated that start-up and small businesses thrived before the present net neutrality rules were enacted and will likely continue to be competitive after the rules are repealed.   While the consequences of the FCC vote won’t be felt immediately, only time will tell what the true impact on U.S. businesses will be.

Fancy Food Show – Same Same but Different

The first major food/beverage trade show of the year, The Winter Fancy Food Show, rolled through Moscone Center in San Francisco a couple of weeks ago, attracting over 1,400 exhibitors and 25,000 visitors.  After eating our way through the show and talking to countless entrepreneurs and a few large players, we are pleased to report that the mood on the floor concerning the food and beverage industry and its consumers was extremely positive and optimistic.  MHT Partners hasattended the show for years, and every year it seems to grow both in terms of exhibitors and attendees.  The general vibe was similar and the major trends were also familiar – same same but different – from recent years.  A few trends that struck us:

  • Protein is IN – from the never ending procession of dried meat purveyors and countless varieties of cured meats, protein is currently a powerful trend. We were delighted by La Quercia’s absolutely fantastic American-made prosciutto from Iowa-raised hogs.  We even sampled some meatless jerky, which was not as bad as it sounds but not as good as promised.  Protein was also represented by nuts in all kinds of forms, from powders to butters, in a dizzying array of flavors.
  • Functional beverages – we continue to see new players every year hawking the latest concoction powered by an array of stimulants and sweeteners. Not surprisingly given the San Francisco location, hemp-based beverages had a visible presence, as did the mighty coconut in many forms – water, milk, and even yogurt.  One of the exhibitors was kind enough to add a splash of bourbon or vodka, demonstrating just how functional their drink could be.
  • Gluten free (“GF”) – as a parent of a GF kid, I’m now much more attuned to the category, and this year I was pleased by not only the diversity of snack and meal options, but also by the taste. Seems like almost anything can be made with a GF variety, which in some cases actually taste better than their gluten full counterparts.  Case in point – I sampled a delicious fresh GF pasta that was every bit as good as what you could order in your local trattoria.
  • Wholesome indulgences – sweet treats consisting of organic, locally sourced, sustainably farmed, and non-gmo ingredients were everywhere, from chocolate to caramel to ice cream. The ice cream wars are heating up, not only with new entrants into the super-premium category (I sampled Cool Haus’ ‘Milkshake with Fries’ flavor that included actual French fries – actually pretty good), but also with several established players like Three Twins who have introduced a ‘light’ ice cream to compete with the likes of Halo Top.
  • Products with purpose – Millennials are less loyal to big brands than older generations, and they are even less obsessed with perceived value. They want their products to have a purpose and they often make their choices based on the values the product/brand du jour represents.  If your energy bar doesn’t contribute to making fresh water, saving a life, or restoring a rainforest, you’re missing out on a whole generation of consumers.

We look forward to seeing how these trends impact food and beverage M&A in the coming year – no doubt, some of the major food conglomerates and private equity investors interested in the category will be interested in pursuing targets that capitalize on these trends.

Growing Popularity of the Gap Year

It is no secret that students aspire to a college degree due to the broader employment opportunities and increased lifelong wages that come from it.  However, not all millennials view going to college with the same urgency as in the past.  As an education-focused investment bank, we are seeing an emerging trend among students to take a break (typically one year) from academics to pursue other interests.

Taking a gap year prior to college is gaining popularity among high school graduates.  Once frowned upon by parents and academic advisors, there is a growing consensus that taking a year off from academics after high school may benefit a student’s ultimate success.  By taking a gap year, students may enter college more focused, mature, and motivated for their undergraduate experience.  Among all gap year students, approximately 90% matriculate in college within one year.  Recognizing the positive effects on students, gap years are gaining acceptance by post-secondary institutions alike, and many elite universities allow students to defer admission for one year.  Ivy League schools like Cornell, Dartmouth, Georgetown and Yale allow delayed enrollment for 20 to 60 freshman students each year.

There are numerous reasons to pursue a gap year and just as many opportunities to be gained from it.  Some students seek unpaid volunteer or paid work experience to gain perspective, maturity and real-world experience.  Others explore personal interests via travel, allowing them to gain independence and develop a purpose for their future.  To be clear, a gap year does not need to be a break from academics altogether.  Some universities offer programs that help bridge the rigorous transition from high school to college by allowing students to earn college credit in advanced courses.  These classes help reinforce the academic concepts learned in high school as well as further build a student’s academic record in preparation for college.

Research performed by the Gap Year Association suggests that taking a structured gap year invariably serves to develop an individual into a more focused student with a stronger sense of purpose.  Students return to school more prepared and often revitalized for life in the academic world.  Research suggests that taking a gap year can also improve overall performance in college, with gap year participants graduating with higher grade point averages than observationally identical individuals who go straight to college out of high school.  This outcome holds for gap year students with lower academic achievement in high school.

Going forward, it is likely we will see more students seeking alternatives to the traditional path to higher education, with the gap year being one variable influencing the way that students discover their long-term interests and a career.

The Sparkling Water Revolution

Sparkling water is one of the hottest consumer products in years. Among changing consumer preferences, new market entrants, private equity investments, and strategic acquisitions, sparkling water has the makings of a craft beer-type revolution. Americans, once heavy soda drinkers, have been looking to reduce sugar, calorie, and artificial sweetener intake. Enter a sugar free, calorie free, flavored sparkling water, which when consumed, has many of the desired taste features of a traditional soda. According to Nielsen, the sparkling water category has doubled over the past 4 years, growing from $961 million in the 52 weeks ending June 1, 2013 to $1.8 billion in the 52 weeks ending May 27, 2017.

One of the largest contributors of that growth is La Croix, a subsidiary of National Beverage Corp. (Nasdaq: FIZZ), which is arguably the most recognizable brand in the sparking water industry today. Sold in pastel-colored cans and available in a wide variety of flavors, it seems everywhere you look, from office and home refrigerators to end-cap displays in grocery stores, you see La Croix. The brand has developed a loyal cult following thanks to a social media strategy specifically targeting millennials looking to immerse themselves in the latest on-trend craze. National Beverage Corp. has seen tremendous growth through the first half of its fiscal year 2018 as revenues grew 20% to $504 million, operating profit increased $27 million, and net income increased 35%. La Croix is clearly one of the leading drivers of their tremendous success. Interestingly enough, La Croix has been in the market for over 30 years, but sales significantly increased in 2010, largely attributed to changing consumer preferences and more health-conscious decision making.

Speaking of soda, the largest soda-production company in the world has entered the sparkling water movement. In October 2017, Coca-Cola North America announced the acquisition of the rapidly growing, Mexico-based Topo Chico premium sparkling mineral water for an estimated $220 million. Coca-Cola, through its Venturing and Emerging Brands unit, is in the business of identifying, acquiring, and growing smaller, high-value brands, and they believe Topo Chico, and sparkling water in general, to be the next big thing.

Not surprisingly, private equity investors are also focusing on the sparkling drink enterprise. VMG Partners, a San Francisco based private equity firm, invested in Spindrift, America’s first and only sparkling water made with real, squeezed fruit, in May 2017. Spindrift, as of May 2017, has seen more than 800% growth in revenue over the past 24 months.

SodaStream (Nasdaq: SODA), another notable brand name in the category, manufactures and distributes home beverage carbonation systems, and is gaining significant momentum in the industry. In November, SodaStream announced it was launching its premier flavor essences, Fruit Drops, and sold out online in just two weeks. The company’s shares were up approximately 75% in 2017 and they continue to beat earnings estimates.

Sparkling water, once considered mainly a mix for cocktails, is now an everyday beverage for many Americans. We look forward to continuing to see the evolution of the category and subsequent transactions in food and beverage M&A.

Succession Planning and Unlocking Value in Your Practice

It is never too early to lay the groundwork for unlocking the value in your medical practice.  Whether the ultimate goal is liquidity, business continuity or exploring the role of consolidator, there are many advantages of planning for an ownership change three to five years before your desired transaction date. The main benefits include maximizing the ultimate sale value of the practice and preserving your legacy for yourself, your employees and your patients. By preparing appropriately, you can optimize the strategic alternatives for your practice.

A vital part of the planning process is the transition over time to new, younger physicians and extenders. This process serves two purposes: 1) potential investors must be confident that clinical partners and patients remain with the practice through the ownership change, and 2) patients continue to receive the same level of high-quality care. Among the assets that the buyer is obtaining during an acquisition, established providers and loyal patients are some of the most valuable. Further, most private practice owners are very proud of the goodwill they have built and strive to preserve this goodwill by ensuring that patients will continue to receive a high standard of care. By planning for the transition in advance, the practice ownership has time to evaluate and implement an appropriate long-term patient care model, even if it means transitioning patients to new providers over time.

Another important factor to consider for succession planning is the financial structure of the practice. Until recently, there were few options for physicians seeking to retire other than to completely sell their practice to another physician (often requiring a buyer who could pay 100% cash upfront), or to close doors and lose the goodwill that was created over the years. Multiple solutions and alternatives for physicians are more readily available today, especially as private equity groups have shown a renewed interest in investing in specialty physician practices.

The leading alternative is the establishment of a managed services organization (MSO), which allows the physicians to maintain total control of the clinical aspects of their practice while relinquishing control of the non-clinical aspects.  Under this construct, the selling physicians can monetize a portion of their practice and can transition from a true partner-physician model to a hybrid one, where physicians remain employed by the clinical practice while retaining an equity stake in the MSO. This also enhances the ability to attract younger physicians, as MSO shares can be offered as a sweetener to a traditional productivity-based compensation package.  This model has gained substantial momentum over the last few years, as it can be structured to benefit the buyer, the selling physicians, and the physicians who will join the practice in the future.

As with any large business decision, it is wise to seek advice from transactional and industry experts prior to making any permanent decisions. A healthcare investment bank can inform you of your options for succession planning and can help to craft customized solutions that strive to maximize your practice’s value, even if you are several years away from contemplating a potential sale.

Teaching Teachers – State of Professional Development

Did you know an overwhelming majority of teachers believe professional development is ineffective in its current form? Studies show teachers consider professional development programs to be largely irrelevant and out of touch with the core focus of their work, which is to educate students. Teacher feedback suggests that programs are slow to adapt to the ever-changing nature of their profession, particularly when it comes to incorporating modern technology and learning tools in the classroom. Historically, teachers have been given little ability to personalize their professional development learning plan, which has ultimately resulted in many viewing professional development as nothing more than a compliance exercise.

Professional Development of the Past
Traditional professional development programs are comprised of a variety of programs including workshops, coaching, collaboration with other teachers and self-guided courses. While teachers and administrators generally agree about the characteristics of an effective professional development program, districts often are challenged with proper implementation. For instance, most teachers prefer coaching over other methods, but this method requires consistent evaluation from qualified individuals with enough classroom time to provide relevant and constructive feedback. In practice, teachers believe one-off classroom observations rarely amount to anything more than a written assessment of their performance. As a professional development tool, ongoing coaching is difficult to implement due to administrator time constraints, as they tend to direct their extra time toward teachers with performance issues.

Future of Professional Development
Researchers have spent a significant amount time studying professional development methods to determine the best path forward. In 2015, Congress passed the Every Student Succeeds Act (“ESSA”) to establish priorities and design a new framework for effective professional learning methods. ESSA defines qualified professional development time based on the following criteria:

  • Sustained – Takes place over an extended period of time rather than being limited to a one-time event (such as traditional workshops)
  • Intensive – Focused on specific concepts
  • Collaborative – Involves several educators and/or coaches working together to gain an understanding of the topic at hand
  • Job-embedded – Occurs on a day-to-day basis as part of the normal job
  • Data-driven – Methods tied to actual data about the training needs of the participants
  • Classroom-focused – Relevant to the teaching process rather than being limited to theoretical concepts.

There is clear public consensus regarding the need to improve both the nature and effectiveness of professional development. ESSA provides a starting point for schools and districts as they seek new learning programs that meet these higher standards. To that end, we expect new players to emerge in the professional development market with solutions that are more pertinent, personalized, and productive for today’s teachers.

The Secular Trends Behind the Rising Tide in Wealth Management Technology (“WealthTech”)

The advent of Financial Technology (“FinTech”) has created ripples across the financial services landscape, and wealth management has been no exception.  As a growing subset of Fintech, WealthTech aimed at the Registered Investment Advisory (“RIA”) channel has garnered significant interest from both industry constituents and M&A professionals.

It’s worth looking a bit deeper into the secular trends driving this interest.

Modernization is Taking Higher Priority

Historically, the wealth management industry has been slower to adopt technology.  Now as trillions of dollars in wealth transfers from boomers to millennials, there is a sense of urgency to modernize.  As this generational wealth transfer occurs, RIAs are encountering a growing customer segment that is comfortable utilizing technology.

Realization of Operational Efficiencies

RIAs are facing an increasingly fee-sensitive client base, demanding a holistic approach to wealth management.  This dynamic, coupled with a complex regulatory landscape, has forced RIAs to rationalize back-office spending, while seeking new ways to generate operational efficiencies.  WealthTech providers are largely answering the call, allowing the RIA channel to more efficiently manage client interaction, portfolio management, financial / tax planning and compliance.  Notable examples include SS&C Technologies, Envestnet, MoneyGuidePro and Orion Advisor Services.

Breakaway Advisors

Another major trend comes from the growing number of advisors entering the RIA channel.  Even with breakdowns in anti-poaching “protocols” and efforts by large wirehouses to own the client relationship, financial advisors are leaving the traditional wirehouse model at a record pace.  Cerulli Associates estimates that more than 12,000 financial advisors were added to the RIA channel over the last five years alone.  While some of these breakaway advisors are joining existing RIAs, others are forming their own practices.  Both of these moves are expanding the addressable market opportunity for WealthTech providers, as RIAs are less constrained in which technologies they utilize.

Looking Forward

Changes in the wealth management landscape, coupled with the ability to utilize attractive SaaS delivery models, are creating promising opportunities for WealthTech providers.  Not only can these technologies help RIAs grow their assets under management (“AUM”), they can also serve as a strong defense and differentiator against lower cost financial advisory alternatives (e.g., Robo-advisors, and Discount Brokers).

MHT Partners believes the WealthTech industry will continue to grow at a rapid pace, with M&A in the sector largely driven by strategic acquirers seeking to deliver a one-stop solution to their customer base.