Nothing Artificial About the Future of Student Intelligence

The world now boasts robo-advisors who pick stocks for investment portfolios and GPS apps that give drivers traffic forecasts for their morning commutes; Artificial Intelligence (“AI”) already impacts lives on a daily basis. Historically, education has been slow to adopt new technology, but it is unable to escape the far reach of AI. While still nascent in the world of education, AI presents tangible opportunities to better the way students learn.

Hold up, what’s AI? In Layman’s terms, Artificial Intelligence refers to a machine’s ability to execute tasks that normally require human intelligence. You may have heard of buzzwords such as “Machine Learning” and “Big Data.” These terms are not synonymous for AI, but they are importantly related. Machine Learning (“ML”) refers to a system’s ability to automatically learn and improve from experience without being explicitly programmed. When a machine is fed data, it recognizes patterns and adjusts its own code accordingly. Big Data refers to the ongoing collection of data from various sources for the purpose of discovery and analysis, such as AI and ML.

So, what’s the big deal? The ability to train computers to accomplish tasks by simply processing and recognizing patterns within large quantities of data has endless applications.

There are numerous ways this powerful technology can impact education.

  1. Lessen Administrative Burden:  AI can transform an existing grading process from a teacher’s burden to a teaching tool. In addition to grading assignments that typically require human resources, AI has the potential to recognize patterns in scores and writing, and even identify students or groups who under- or outperformed. Instructors can use these insights to address areas of student weakness in a time-efficient manner. Students at Georgia Institute of Technology might even find themselves receiving feedback from Jill Watson; a professor’s newly adopted artificial assistant!
  2. Dynamic Feedback: For years, the K-12 market has depended on standardized tests to assess concept mastery, but this method is slow to provide feedback and does not necessarily assess a student’s full range of knowledge. AI can identify holes in student achievement as well as areas of teacher or curriculum weakness with real-time results. Feedback from AI can be more rapid and holistic, and may result in better management of a classroom full of students with varying levels of achievement.  For example, an AI application could analyze student outcomes of an assignment, present feedback on students that need more practice, and assign topic review and practice problems for trouble areas. Some online course providers such as Coursera already utilize AI in this form.
  3. Personalized Learning: Adaptive learning programs that utilize AI software respond to student needs in real time. This application of AI includes repeating topics the student has not mastered, or timing concept introduction and re-introduction to optimize knowledge retention. AI has the capacity to create completely individualized learning plans that dynamically adapt to student tendencies. These methods not only can be applied inside the classroom, but also at home through intelligent tutoring systems (“ITS”). Knewton, Carnegie Learning and Third Space Learning are just a few examples of companies making these AI applications a reality.

AI is not without its constraints, and cannot emulate certain human characteristics, such as empathy and encouragement, which are critically important to the emotional, social and behavioral development of students. While the limitations of AI cannot be ignored, neither can its potential to profoundly improve the way students are educated. The past two decades are marked by the struggle to personalize learning in order to accommodate various student backgrounds, learning styles and needs. By complementing the irreplaceable and distinctly human aspects of teacher-student relationships, AI’s capacity to provide actionable insights to educators and students will ultimately help transform the classroom from a “need to know” to “want to learn” environment[1].

Source: IBM Watson Education


We’ve Come A Long Way Baby

Parents are continually searching for products that will make life with an infant a little bit easier, which these days include a wide variety of tech-enabled products and services meant to help babies sleep longer, eat better, and stay safer.  As the juvenile products’ industry has increasingly embraced advancements in technology, new parents are faced with a litany of new product choices, including cradles that rock themselves, wearable devices that monitor sleep patterns, temperature, oxygen levels, and heart rates, and highly engineered baby monitors controlled by smart phones.  While the dizzying array of evolving product options may be overwhelming for new parents, it continues to fuel growth in the U.S. durable juvenile products’ market, which grew to $6.4 billion in retail sales in 2016, according to The NPD Group.

Beyond growth driven by the emergence of tech-enabled products, several demographic and spending trends also continue to spur expansion in the market for goods and services for infants and children.  Specifically, the category benefits from over 3.9 million annual births each year in the U.S., creating consistent demand for new products.  Parents and grandparents prioritize the health and well-being of their children and grandchildren, often sparing no expense in purchases to ensure they have the “best of everything,” from cribs to strollers to car seats.  While rising discretionary income contributes to the spend on these products, the juvenile products’ industry also remains less susceptible to economic downturns to some extent, as families are less willing to cut back spending on children versus other areas within a household budget.

As a result of these positive dynamics, the juvenile products’ industry is an area of continued interest for private equity investors, contributing to a robust M&A market within this attractive subsector of the broader consumer products’ industry.  Strategic buyers in the sector are also focused on pursuing acquisitions of not only well-known trusted juvenile brands, but also emerging companies that have developed many of the new tech-enabled products that have revolutionized the market in the past decade.  Companies with strong e-commerce platforms are of particular interest to potential acquirers, as Amazon and other online channels have become an increasing resource for new parents looking to find the newest, safest, and most useful products.

Ongoing demand for acquisition opportunities from both strategic and financial buyers bodes well for the innovative companies developing game-changing products and services to enhance the quality of life of parents and their children, as owners and entrepreneurs will have various options should they wish to pursue a sale of their business.

Source: The NPD Group

Key Takeaways from the McDermott Will & Emery 12th Annual Health Care Services Private Equity Symposium . . . a Continuation

MHT Partners’ Healthcare Services practice leadership team’s key takeaways from the McDermott Will & Emery’s 12th Annual Health Care Services Private Equity Symposium:

Core Trends . . . a continuation

Demographic Tailwinds/an Aging, Ailing Population: Where dollars go, investors follow, and the healthcare industry is no exception.  Funds allocated to cover the cost of healthcare services (both commercial and public) continue to grow, reflecting an aging, ailing population.  Unique among other industries, healthcare expenditures have grown at an unpreceded rate over the past 20 years as more patients consume more healthcare services across the board.

MHT noted increased interest in home healthcare, hospice, and palliative care businesses.  While few scalable models have emerged, and the talent market remains tight, long-term trends should support these businesses as the country looks for a compassionate, cost-effective means to support the older members of our communities.

Solving the Healthcare Cost Equation:  Being a part of the solution makes sound business sense.  Opportunities abound to streamline costs and improve patient care.  As larger groups form, better purchasing terms can be established.  As different groups and specialties consolidate, patient care can be enhanced, and costs reduced.  Revenue cycle management systems can help find and correct billing inaccuracies.  One example MHT noted in our conversations (and informed by our work with orthopedic groups) is the opportunity to move towards more comprehensive, cost-effective care bundles.  With CMS’s decision to pay for total hip and knee procedures, orthopedic groups who own ASCs can provide outpatient treatment obviating an expensive hospital stay.  This decision also allows orthopedic groups to partner with physical therapy groups to offer a “one-stop-shop” for the provision of a common surgical procedure for aging patients.   Similarly, palliative care can reduce the cost of near-to-end-of-life care.  While unpleasant to think about, spending on Medicare beneficiaries in their last year of life accounts for about 25% of total Medicare spending on beneficiaries age 65 or older.  By caring for these patients at home, in the company of their families and loved ones, meaningful healthcare dollars can be saved.

Sub-Theme – Get Patients Out of the Hospital:  As noted in the examples above, getting patients out of the hospital and into care settings with lower overhead can significantly reduce costs and improve patient outcomes.

Emerging Areas of Interest

Throughout our conversations, we were keen to note new areas that senior members of the healthcare investment community were interested in.  Of note, these ideas peaked our interest:

Taking At-Risk Positions: Companies with deep healthcare experience, in an effort to collaborate with health systems and payors on larger / more proprietary opportunities, are willing to take at-risk revenue positions in the form of severing capitated patient populations, building or participating in ACOs, or setting up pay-for-performance revenue models (specifically related to medical devices).

The Next Wave of Specialty Physician Consolidation: Based on the success of efforts in the dental, physical therapy, vision, and dermatology sectors, investors are seeking new specialties to consolidation.  Notably target specialties include GI, Urology, Podiatry, OB/GYN/Women’s Health Serveries, and orthopedic surgery practices.


Coming out of the Health Care Services Private Equity Symposium, there was a great amount of enthusiasm for finding good healthcare deals and putting investment dollars to work.  MHT is excited about healthcare deal opportunities in 2018 and looks forward to core investment themes and new areas of interest as they continue to evolve and shape the market for healthcare assets.

Key Takeaways from the McDermott Will & Emery 12th Annual Health Care Services Private Equity Symposium

This month, McDermott Will & Emery, a leading provider of legal services, hosted its 12th annual Health Care Services Private Equity Symposium.  Over the years, this conference has grown into a must-attend event for dealmakers and executives interested in healthcare services transactions.

MHT Partners’ Healthcare Services practice leadership team was in attendance, along with a vast majority of healthcare-focused private equity sponsors and other key players to discuss the state of the U.S. healthcare industry, drivers of and trends in recent M&A activity, and strategies for investing in and building great healthcare businesses. As a leading healthcare services investment bank, below are a few of our key takeaways from the conference:

Deal Activity

Deal activity for healthcare services business remained strong throughout Q4 of 2017, and with Q1 of 2018 nearly complete, there seems little sign of dealflow abating. That said, high valuations and increased competition continue to make it a challenging environment for healthcare investors.  While dealflow has remained strong, getting deals across the finish line is more complex.  Borrowing a phrase that has been heard recently in the context of high valuations, “deals are priced to perfection,” meaning that given the lofty expectations of both buyers and sellers, issues that may once have been noted and moved past in confirmatory diligence, now frequently result in deal re-pricing and stalled deals.  Concerns about the broader economy remain held in check, somewhat, by the underlying tailwinds (demographic, political, financial) propelling the healthcare industry.   Additionally, significant amounts of capital both in the form of “dry powder” held by financial investors and debt from lending sources remain available for healthcare deals.

Core Trends

The key themes that have driven healthcare investment in prior years remain as valid and viable as ever. Below are several concepts that we repeatedly discussed during our conversations with financial sponsors and healthcare executives.

Consolidation/Race to Scale:  There is a continued belief in the power of numbers, as evidenced in the ongoing specialty physician practice rollups being pursued by multiple financial sponsors across multiple disciplines.  The thesis for these deals holds that larger groups can offer more care across more locations to patients, reduce costs associated with back-office functions (and make sole practitioners’ lives a bit easier), and negotiate more favorable rates with commercial payors.  The success of a number of these rollups in dental, dermatology, and vision care (among a few specialties) has emboldened many groups to enter the fray.

For more mature specialties like dermatology, where a number of private equity platforms have been established, MHT Partners expects to see a wave of consolidation in the next 18 months as clear winners and losers emerge and larger groups consolidate.  Interestingly, MHT has noted a meaningful amount of interest in emerging areas of specialty physician practice consolidation including orthopedic surgery groups (particularly those owning ASCs), GI, Urology, ENT and OB/GYN practices.

General Mills Acquires Blue Buffalo

With their recently announced acquisition of Blue Buffalo, General Mills recently got back into the pet food game (after 50 years) in a big way, in order to cater to the newest members of the American family – pets.

At ~$8.3 billion, General Mills is paying a steep price of ~26x EBITDA (and a 17% premium to Blue Buffalo’s closing stock price the day before announcement), but obtaining a strong brand that is on trend with large prominent macro factors at play (clean label, organic and natural ingredients, appeal to millennials, purpose-driven brand, etc). Blue Buffalo, with 2017 sales of over $1.3 billion, including over $250 million from the fast growing and highly coveted eCommerce channel, also adds instant heft to General Mills’ top line, as Blue Buffalo’s sales are ~ 8% of General Mills’ sales. While the market respects the strategic fit of Blue Buffalo, questions regarding the steep valuation, as well as the sustainability of General Mills’ dividend going forward, have driven General Mills stock price down ~7% since the announcement.

This acquisition is yet another example of immense, and sometimes stagnant, consumer packaged goods (“CPG”) companies entering, or bolstering their positions, in the rapidly growing (certainly relative to packaged food) pet/vet space via acquisition. Other recent notable acquisitions include Smucker’s acquisition of Big Heart Brands and Mars’ acquisition of VCA.

General Mills and their CPG brethren are well aware that when it comes to the pet space, “this dog hunts!”, and will undoubtedly continue their pursuit of attractive companies in the space.

What Makes a Successful EdTech Company?

Over the last decade, MHT has met with numerous education technology (“edtech”) companies that are all tackling similar pain points. As education investment bankers, we are asked repeatedly by investors and entrepreneurs what attributes make a company successful. There is no singular characteristic. In fact, the most successful companies typically have several. While we can’t cover all of them in one article, below are some of the more important ones:

  • Product or Service Meeting Market Demands. While it may seem intuitive, we see some companies selling products or services that are limited in scope or address a small number of problems or a small faction among the universe of administrators, teachers, parents and student users. The more comprehensive the solution for the various constituents, the more valuable the technology or software will be due to implied adoption of the product and its addressable market.
  • Measuring ROI or Outcomes. Depending on the customer in focus, edtech companies should be able to demonstrate a positive measurable impact on its user base. In most cases, corporate customers focus on ROI, while school administrators seek measurable improvements in student comprehension and assessment results. In either instance, an edtech company should be able to point to evidence of positive impact and improvement for its customers and users.
  • Right Team, Right Time. Occasionally, we identify companies with compelling market opportunities and technology-enabled products or services experiencing growth and scale. Among those same companies, we have found management teams lacking the requisite experience and depth to sustain long-term growth. While holes in management teams are not always a negative for certain investors, an incomplete management team may not be a fit for many institutional investors or strategic acquirers.
  • Competition vs. Pricing. As education investment bankers, we have advised clients that compete successfully in highly competitive markets as well as those that are successful in less competitive markets. Common among all of those edtech companies is a compelling value proposition for customers relative to pricing. That is to say, customers will pay a premium for a product or service that provides meaningful value and a differentiated solution compared to one that is viewed as a commodity in the current market.

With those summary attributes in mind, there are many successful and emerging edtech companies across all segments of education representing opportunities for investors. At MHT, we stay up to speed on industry trends while forging and maintaining relationships with market leaders and the universe of acquirers.

Healthcare IT Industry Spotlight Interview, Part 3: Casey West, Managing Director at SSM Partners

You’ve made investments in companies such as Apixio and RemitData that offer solutions based on vast amounts of healthcare data. What opportunities do you see in healthcare data science and how do you evaluate risks and regulations when considering healthcare data investments?

This is one of the biggest questions in the industry. In the status quo, there is more data, both structured and unstructured, in healthcare than ever, primarily as a result of electronic health records (EHR) adoption. So, we are capturing more data than ever, yet the historical challenges around data and healthcare persist: providers are concerned about who gets to see their data, maybe rightfully so. Who knows what payors will do with provider data? Solutions providers, I won’t name names, are also not so quick to make their data available.

Frankly, the integrity of data is a big challenge. Harmonizing data between different systems is not easy. You see this in the pop health sector where the smaller companies are really challenged to standardize data and glean useful, credible insights from many different electronic medical records (EMR) systems.

This is something that I have been thinking quite a bit about lately and consider a “Black box problem.” It’s a first order data problem that we have not yet come to grips with. We are flush with data, but providers tend to struggle to determine whether it’s credible. Thinking about the application of machine learning and data analytics in non-healthcare settings, I’m reminded of when I first subscribed to Netflix. It began making recommendations: some were good, some were bad, and it improved. In a healthcare setting, when you are making treatment recommendations to a physician, you are not going to get 10 bites at the apple. The opportunity to prove yourself is limited, so if the analysis is not good, you will lose your opportunity to influence behavior. That is a big difference between healthcare and other industries. As our society brings young physicians and healthcare providers up, it does so in a pretty rigid and hierarchical fashion with oversight. In this system a lot of mistakes are made, and hopefully caught by other providers who teach their students to do better. What is a similar context for systems to do that, and how do we train systems in a safe and effective manner? I don’t think we’ve figured that out, so the promise of big data in healthcare is enormous. We are all grappling with the enormity of that opportunity, but we still have some pretty significant hills to climb.

Apixio, which is a great company, doesn’t operate in the clinical space. It focuses on coding and makes coders much more efficient and accurate, which is saving people a lot of money. This is still a setting, however, where lives are not at stake. Nobody would die as a result of what would be acceptable “learning behavior.” We like that dynamic.
Open application program interface (“open API”) has transformed technology companies in other verticals, but has yet to make any real headway in healthcare. Do you think that open API will play a role in the next wave of healthcare IT innovation and investment?

We’ve invested in at least 1 company that created APIs for its partners to pull data from within our solution with limited success. In the broader context of clinical data, the lack of EHR harmonization limits your ability to glean real insights from your data. There’s a lot of data cleaning that needs to be done before you get clinical insights.

I think that a lot of the excitement surrounding open APIs in healthcare comes down to empowering patients to access their own data. That is less encumbered by the challenges faced by larger clinical data sets. It is still in its early days, but I can certainly personally relate to the desire to have access to my information presented in a simple manner.

What advice do you have for entrepreneurs who are deciding whether to bring on a financial partner such as SSM?

Select first based on chemistry, second based on potential to add value, and third based on price (of course, those are easy words to say, if you’re in the midst of a negotiation on price). I’d maybe flip the first two, but the point is that it’s a long-term relationship that needs to be based on trust if it will be successful. Chemistry and competency are core to that trust. Taking a haircut on value could make you much better off with a trusted, value-added partner. Additionally, just like in life, when you take on a partner, things change, and you should be ready for and mindful of those changes. It is a core part of growing up as a person and as a company.

I’m in Memphis for one day. What’s not to be missed?

You have to eat barbecue. You should also go to the National Civil Rights Museum. It’s a powerful, awesome place.

Why Dealmakers Are Attracted to the Digital Marketing Sector

Spending on digital advertising in the U.S. continues to explode, mainly because Americans love their devices. We spend close to 11 hours a day—approximately two-thirds of our time awake—staring into a phone, computer, tablet, wearable device or other screen-based product. Given this attraction/addiction, digital marketing has become the largest spend of many advertisers’ budgets.

According to eMarketer, digital ad expenditures surpassed spending on TV ads for the first time in 2016 and digital extended its lead in 2017. eMarketer estimates that digital ad spend in the U.S. increased 15.9%, reaching $83.0 billion in 2017, while TV ad spend only grew 0.5% to reach $71.7 billion. eMarketer expects spending on digital ads to continue its robust growth with double-digit growth rates continuing through 2021.

The vigorous growth in digital advertising has supported strong merger and acquisition activity for digital advertising agencies, which help clients spend their digital marketing dollars more efficiently. Interest in acquiring digital agencies is widespread, with global consultancies and private equity firms joining traditional advertising agencies in the hunt for companies that will benefit from the sector’s rapid growth.

Traditional agencies such as WPP, Omnicom and Dentsu are actively building their digital capabilities and relationships to garner a larger piece of the ever-expanding digital pie. Already, the largest advertising agencies have 30-40% or more of their revenue coming from digital. That percentage should grow as traditional media continues to be pushed aside by the digital bully.

Global consultancies such as IBM, Deloitte, KPMG, and Accenture continue to push further into the sector with additional acquisitions. According to a recent report issued by R3, an independent consulting firm, consultancies invested $1.2 billion in agency acquisitions worldwide in 2017, a 134% increase compared to 2016.

Private equity is also attracted to the burgeoning digital marketing sector, not only for its rapid growth, but also for its size and fragmentation. According to IBISWorld, the U.S. Digital Advertising Agencies’ industry generates revenue of approximately $15 billion, and over 7,700 businesses comprise the industry. IBISWorld predicts the industry will grow at an average annual rate in excess of 11% through 2021. Private equity firms such as Baird Capital, BV Investment Partners, Mountaingate Capital, Stagwell Group and Svoboda Capital Partners have invested in digital agencies and others continue to look for their chance to enter this growing, attractive industry segment.

Bottom line: hungry, aggressive acquirers will continue to seek differentiated, high-growth digital agencies as marketing budgets continue to shift towards delivery of personalized advertising to increasingly mobile Americans.

Who’s Driving STEM Education?

As a long-time global leader in STEM fields (Science, Technology, Engineering and Math), American scientists and innovators have accomplished many extraordinary and once unimaginable feats. From Thomas Edison’s invention of the light bulb to Neil Armstrong’s famous first moonwalk, there is no shortage of contributions that America has made to the scientific community over the last two centuries. In recent years, however, America has begun to fall behind other developed countries in STEM fields.

According to a recent Pew Research report, Americans rank K-12 STEM education as average at best. Why is the U.S. falling behind in these subjects when other countries are forging ahead? One could point to a variety of reasons, but one thing is certain – companies serving K-12 are realizing that curriculum alone is not enough to help students gain and retain knowledge in these subjects.

Corporations, especially technology companies, are pooling resources to improve STEM education for elementary, middle school and high school students. The private sector has recently committed more than $300 million to STEM education, with companies like Facebook, Salesforce and Google pledging $50 million each to computer science programs. Amazon and General Motors have contributed to the funding as well, and other companies, such as GE and ExxonMobil, have supported STEM education through their own financial contributions.

The contributions don’t just stop at funding. Companies are also investing time and talent to improve STEM education. Apple and Microsoft have rolled out summer camps, workshops and day programs. Microsoft has introduced Hacking STEM, a collection of lesson plans and hands-on activities for K-12 teachers available on their website, and Lockheed Martin hosts a variety of programs and events encouraging K-12 STEM participation.

Since 1990, STEM occupations in the U.S. have increased 79%. Even companies that have traditionally operated outside of STEM fields have shown an increasing need for STEM-capable workers as they integrate technology into their systems and processes. As STEM becomes an integral part of our economy, the skills and qualifications needed are changing across all industries. Companies are partnering with education to ensure students are introduced to STEM at a young age and are best prepared for the jobs of tomorrow.

Who better to support STEM education than the industries that seek to benefit from the STEM workforce in the future? These companies recognize that the U.S. K-12 STEM curriculum is not adequately developing American youth to meet the future demand for STEM employees, and they are actively attempting to bridge the skill gap. In order to remain competitive in STEM fields, the U.S. is relying more and more on the partnerships evolving between companies and education. STEM education may start in the classroom, but leading technology and innovation companies are paving a new path for K-12 students to excel in these fields.

Authenticity in the Outdoor Space

Poser – /ˈpōzər/ noun:  a person who acts in an affected manner in order to impress others. We can’t think of anyone who would enjoy being labeled with that moniker.  Given enthusiasts’ hyper vigilance when it comes to proper bona fides in the outdoor industry, you’re much more likely to hear it, or a related term, tossed around on ski slopes rather than a sidewalk.  While there are many attributes that outdoor and enthusiast brands want associated with their products – durability, fashion, sustainability, social impact . . . arguably the most important is authenticity.  Without being deemed authentic, brands risk being lumped into the “also-ran” category of copycat gear – perhaps attractive to folks buying based on price, but unlikely to garner the attention of the most serious practitioners of the outdoor arts.

Admittedly, authenticity is a bit of a chicken and the egg conundrum.  Companies desire the elite, the trend setters in their respective markets, to utilize their products, thereby providing exposure to the masses, driving increased awareness and demand.  The elite players only want the best, and have neither the time, money, nor volition to go out and canvass the landscape in order to give every nascent brand the tryout it may or may not deserve.  Obviously, up-and-coming brands establish authenticity by searching out up-and-coming trend setters, the superstars of tomorrow, and either provide them with free products or sponsor them to wear gear.  They hope that these budding icons will come to adopt their brands as part of their identity, and as they climb the rungs of the pro-athlete ladder, remain loyal brand evangelists.  Endorsements and incentives are all well and good, but it is important to remember that products’ performance must be consistently outstanding throughout the harshest of trials.  A ripped tent fly during a storm at 17,000 feet elevation can be disastrous.  Disappoint one of your brand ambassadors in the outdoor arena, and you’ll soon find yourself looking for a new one.

So, what happens when brands gain a toehold in an established niche, and then perhaps grow that into a hearty slice of the overall market?  Do success and wide acceptance threaten the authenticity that got you there in the first place?  There will always be consumers who feel that anything marketed to the masses has, by definition, lost its edge, but by and large, people have accepted that commercial success and authenticity are not mutually exclusive.  In the outdoor and enthusiast arena, Northface, Patagonia, Under Armor, and lululemon are all extremely well established.  Their products are seen in every town across America, and much of the world.  Yet, they are still sported by the elite performers who will ask a lot more of their gear than the average person on Main Street.  In short, they have grasped the brass ring of the outdoor market – make premium products for the most demanding of customers, and sell them to the masses at a nice premium.  Authenticity is not only a brand’s foundation, but also good business.